By: Theodore Margolis

Over the years, we rarely discussed our white-collar criminal practice with our client base. Few of our clients, happily, had need for concern about their position and preparation to face criminal charges. In this new world, however, all of that has changed. The businessman, the corporation, the general counsel, the physician and the hospital and even the lawyer must understand that things are different. Most important, being proactive may be the only responsible thing to do.

The Enron, Andersen, Tyco and other prosecutions and the resulting legislation and investigative emphasis on white-collar crimes has brought a keen focus to the conduct of all business entities and corporate leaders. In recent months, the passage of the Sarbanes-Oxley Act, of legislation impeding the ability of a federal judge to give a defendant a shorter sentence, and the impact of the Patriots Act are just some of the indices that things have changed.

On June 16, 1999, the Deputy Attorney General of the United States sent out a memorandum to all United States Attorneys and Department of Justice Department Heads. The subject was “Bringing Criminal Charges Against Corporations.” The thesis of the memo was

Vigorous enforcement of the criminal laws against corporate wrongdoers, where appropriate, results in great benefits for law enforcement and the public, particularly in the area of white-collar crime.

The Justice Department and United States Attorneys Offices throughout the country have worked on developing expertise in areas involving medical frauds, financial crimes, securities law violations and environmental crimes. The FBI has become sophisticated in handling computer crimes, internet crimes and theft of intellectual property crimes. The Foreign Corrupt Practices Act is being enforced. Even the State Department has an investigative unit to police AID and other State Department related programs. The currency and “money-laundering” laws are now something every business must be aware of and be concerned about.

The Justice Department’s policy and case law confirms that, since corporations act through their agents, if an agent acts for mixed reasons and one of those reasons is “…for the benefit of the corporation,” then the corporation may be held criminally liable as long as one motivation of the agent is to benefit the corporation. Of course, the agent must be acting within the scope of his employment, but this simply means he must be performing acts of the kind he was authorized to perform. To be culpable, the corporation need not benefit from the agent’s acts.

The Federal Sentencing Guidelines and the companion trend of state legislators, “being tough on crime,” has been to increase penalties and sentences, to expand the range of conduct which is deemed criminal and to remove more and more discretion from judges who hear cases.

We have seen more grand jury subpoenas and search warrants directed at corporations and business people in the last period than at any other time. In the period after September 11th, most federal law enforcement resources were directed at anti-terrorism duties. Now, agencies are returning to corporate and white-collar crimes and the demand by the public that the “business excesses of the 90s” be brought to an end. This means that over the next few years, at least, there will be more pressure on companies to carefully manage the potential for criminal exposures.

There are proactive steps that each company, large or small, should take. There must be a corporate compliance program geared towards preventing and, if necessary, uncovering criminal conduct within the corporation before the authorities investigate. Although many companies have written compliance programs, many of these programs are shelf programs, with little, if any, active implementation. Because of changes in law or the passage of time, many existing programs are stale and need to be updated or revised. Inert programs can be harmful if a problem develops, since prosecutors will see an artfully drawn but inactive program as a subterfuge. Document retention programs must be properly set up and must be managed at regular intervals. The famous Andersen e-mail reminding employees working on Enron about the document retention program has made prosecutors particularly sensitive to when and why documents are destroyed, even when a retention plan is in force at the company.

When problems arise, the corporation must act and do so quickly. Internal investigations can be a way to get to the bottom of a suspected problem. In the internal investigations we have conducted, we always remind the client that the results of the investigation, assuming wrong-doing is discovered, will most probably be turned over to the authorities at some time. The benefits, however, of a vigorous internal investigation is that, should wrong-doing be discovered, the corporation has the advantage of ending the conduct, making appropriate changes and then reporting to the authorities in a complete and positive manner. Being proactive can protect the corporation from indictment, severe punishment and unwanted publicity.

We have represented corporate executives when allegations about the company implicate or endanger top company officials. Corporations should be prepared to encourage executives to get counsel and to protect their individual interests. At the same time, the corporation should expect and make part of the employment process that the credo of the company is to live within the law and to run an ethical and successful entity. Employees who violate the law must understand that they do so outside the framework of the corporation. Employee handbooks, manuals and employment agreements should deal with these issues.

In new Federal Sentencing Guidelines being released at this writing, base level (the lowest sentence) for corporate fraud, theft for mail and wire fraud, for securities and commodities crimes, and for destruction or failure to maintain corporate financial and audit records have all been significantly increased. This increase was specifically directed by Sarbanes-Oxley. This is a trend that will continue.

Good risk managers always look ahead. A risk of criminal prosecution within corporations is now substantially heightened. Being proactive now can literally save the company.