DECEMBER 1984 / JANUARY 1985 - VOLUME 5. NO 12 / VOLUME 6, NO. 1
Sanctioning Multinational Offenders
by Brent Fisse
Can we devise effective sanctions against multinational corporate offenders? At present, heavy reliance is placed on fines, and yet mere cash exaction is often futile as a means of preventing serious offenses. The punitive injunction, however, is a more potent weapon.
Fines are almost always trivial compared with corporate wealth or income. The classic example is the $437,500 penalty levied on General Electric in 1961 for its part in the electrical equipment price-fixing conspiracies; this was roughly equivalent to a $3 fine imposed on a person with a salary of $15,000.
Since then, many have argued that fines against corporations should be greatly increased. For instance, Elzinga and Breit, in The Antitrust Penalties (1976), have proposed that antitrust violations be penalized by a mandatory fine of 25 percent of a firm's pre-tax profits for every year of anticompetitive activity. However, any attempt to radically increase fines against large corporations can be thwarted by exploiting the principle that an incorporated subsidiary is a distinct legal entity from the parent or holding company. Then, under the principle of separate corporate identity, each subsidiary is answerable only for its own conduct. And any fine imposed on a subsidiary is assessed by reference to its own financial state and not that of the parent or holding company.
This point was brought home shortly after the turn of the century by the $29 million fine imposed by Judge Landis on Standard Oil for illegal freight-charge rebating. Landis maintained that the defendant, the Standard Oil Co. of Indiana, was a puppet of the giant Standard Oil Co. of New Jersey, and expressly related the fine to the financial resources and compliance policy of the parent corporation. On appeal, the fine was struck down as manifestly excessive because the defendant was not the parent, Standard Oil of New Jersey, but the subsidiary, Standard Oil of Indiana.
The distinct legal status of subsidiaries - the Standard Oil slick - still fouls up corporate regulation today. One example is the Browning Arms case in Canada in the mid-seventies. The fullyowned local subsidiary, a company with a turnover of $C3.5 million and pre-tax profits of $C 140,000, was convicted of resale price maintenance and fined $C60,000. On appeal, the fine was reduced to $C10,000. For the parent U.S. company (which had a turnover of $C55 million), and for other multinationals with Canadian subsidiaries, this fine was hardly a punishment which jolted the conscience but a minor expense of doing business in Canada.
One response is to pierce the corporate veil by statute and to assess fines according to some index of the financial resources of the multinational enterprise. For instance, under the European Economic Community antitrust laws, fines may run up to 10% of the offending company's previous year's turnover. In the case of multinationals, the fine is based on the world turnover of the enterprise, not just the turnover generated within the EEC by a local subsidiary.
However, this is a limited solution. Fines are ultimately enforcable only by seizing those assets of the defendant that happen to be located within the boundaries of the country or jurisdiction bringing the case. Thus, a large fine based on the global turnover of a multinational is only partly enforcable when the local assets of the defendant are relatively small. And even where those assets are sufficient to cover the fine, enforcing payment may drive the local operation out of business, with disastrous effects on workers and trade creditors.
A second major weakness of fines is that they do not focus on the defective organizational policies and procedures which often cause corporate offenses. There is no obligation to do more than write a check, even where the offense has resulted from grossly inadequate internal controls which, if uncorrected, are bound to result in further violations. This is a matter of particular concern in the context of multinational corporations, the far--flung operations of which are extremely difficult to police. Internal compliance systems typically offer the most feasible means of preventing offenses and yet we seek to achieve effective internal compliance by the indirect and chancy method of fines.
Consider the sanction recently imposed on Digital Equipment Corporation under the U.S. Export Administration Act. Digital was alleged to have supplied militarily-sensitive computer products to a West German company run by a person with a track record of illicit re-exportation of U.S. goods to the USSR. Denying any wrongdoing, Digital agreed to pay a penalty of $1.5 million, reducible to $1.1 million if it committed no further export law violations over the next three years.
Admirable as it is to use incentives as well as disincentives in corporate regulation, it must be questioned whether a monetary sanction is enough to guard against repetition in a case like this. The Commerce Department is reported to be subjecting Digital to far closer scrutiny when authorizing export sales, but there are obvious limits to the depth and scope of external scrutiny; Digital is much more likely to know that is cooking, at home and abroad. As far as Digital is concerned. presumably the $1.5 million penalty is supposed to catalyze more diligent efforts toward compliance. However, a defendant in this position can decide to do little or nothing and hope that it will avoid further trouble.
Another severe limitation of fines is that they are targeted at the corporate entity and not at any personnel who should be held accountable for the offense involved. This would be immaterial if personnel were prosecuted successfully, but this rarely happens because enforcement resources are usually very limited and, in the case of multinationals, birds at risk of prosecution can migrate beyond jurisdiction and still retain their jobs.
The inevitable enforcement strategy is to rely greatly on proceedings against corporations in the hope that internal disciplinary action will be taken against those responsible, wherever they may be stationed in a company's world-wide operations. Fines poorly reflect this strategy because they provide no guarantee that a corporate defendant will in fact bother to undertake internal discipline; a disciplinary program may be viewed as too disruptive, too embarrassing for high-placed managers or too fertile a source of civil litigation against the company or its officers. In other words, the buck can easily stop with a corporate pay-out, not because of any socially justified departure from the traditional value of individual accountability, but rather because that is the cheapest or most self-protective course for a corporation to adopt.
In fact, fines against corporations can even be used to sell out individual accountability. Take what happened in 1981 after the McDonnell-Douglas bribery affair with Pakistani Airlines. Fraud and conspiracy charges against four top McDonnell-Douglas executives were dropped in return for a guilty plea by the company to charges of fraud and making false statements. Under the plea agreement McDonnell-Douglas copped a fine of $55,000 and agreed to pay $1.2 million in civil damages. This deal was struck after an unusual meeting between Associate Attorney General Rudolph Guiliani and McDonnell-Douglas in the absence of the prosecutors, George Mendelson and Michael Lubin. Mendelson and Lubin, who subsequently resigned from the Justice Department, were of the view that the liability of the four executives had been "bought off' by the settlement.
Given the weaknesses of fines, would non-monetary sanctions be more effective? One possibility is to incapacitate an offending corporation by dissolution, forfeiture, plant closure or denial of trading privileges. We may not be able to imprison corporations but we can at least give them the chop. However, these sanctions are unconstructive and if applied with any vigor, would have severe spillover effects on workers and consumers.
More promising than incapacitation is the sanction of community service. Why not require a corporate offender to undertake some socially useful project using its own skills and expertise? For instance, a pharmaceutical company convicted of exporting banned drugs might be sentenced little use where a corporate defendant decides to tough it out. An appalling feature of major corporate scandals is that the initial smoke of adverse publicity is rarely followed by the flame of follow-up inquiries.
A notable exception is the infant formula disaster where the responses of the companies were actively scrutinized by the media.
More typical is the aftermath to the Air New Zealand crash at Mt. Erebus. The Royal Commission of Inquiry and the accompanying mediafest focused on the causes and circumstances of the crash, and the possibility of an attempted cover-up by the airline. But what of the company's reactions to the Commission's proposals that navigational and administrative procedures needed to be changed'? These were left to the company's discretion. Just how that discretion was exercised has never been the subject of public inquiry.
This suggests the need for a sanction geared directly to internal organizational controls; as Christopher Stone urged in Where the Law Ends (1976), only by entering the "black box" of the organization can we hope consistently to prevent corporate wrongdoing.
One vehicle for imposing such a sanction is corporate probation, which is already available under U.S. federal law and in some other jurisdictions. Thus, a condition of probation can be that a defendant undertake a program of internal discipline and/or rectification of faulty compliance procedures.
Another possible vehicle is a sentence of "continuing judicial oversight," as recommended in the American Bar Association's Standards for Criminal Justice (1980). Under this proposal, an experienced corporate attorney, a firm of auditors, or a professional director could be appointed to monitor the internal control system of a corporation where (I) the criminal behavior was "serious, repetitive, and facilitated by inadequate accounting or monitoring controls" or (2) there is "a clear and present danger" to "public health or safety."
However, probation and continuing judicial oversight are rather benign criminal sanctions. Probation has traditionally been a soft sentencing option because it is more in the nature of a rehabilitative remedy than a deterrent or retributive punishment.
Likewise, continuing judicial supervision is essentially remedial, being much akin to the civil injunctions which the SEC and other agencies have used to make corporations improve their compliance systems. Serious cases call for a to undertake a medical relief program involving the manufacture and supply of effective drugs or equipment which, under normal market circumstances, would not be sufficiently profitable.
The Oralyte experience is suggestive here. Oralyte, a cheap saline solution which, although commercially unattractive to the pharmaceutical industry, is more effective than antibiotics in combatting diarrhea in Third World countries, has had to be manufactured under contract to the World Health Organization.
Adverse publicity is a stronger weapon and one which has already been used against multinationals with conspicuous success (most notably the publicity campaign against Nestle and other companies involved in the infant formula scandal). Beyond the value of investigative journalism, we should not overlook the force of formal publicity as a sanction.
Given the importance large corporations attach to having a good public image, there is a strong case for exploiting this sensitivity by making publicity available as a court-ordered sentence. A sentence of this nature would require a defendant to publicize details of its offenses in specified media, an approach adopted in a recent pollution case where a Los Angeles shipbuilding firm was ordered to expose its wrongdoing in an advertisement in the Wall Street Journal.
Used skillfully, adverse publicity orders can hurdle jurisdictional barriers in sentencing. In cases such as that of Browning Arms in Canada, for example, the practical upper limit of a fine is governed by the amount of locally seizable assets and the extent to which those assets can be seized without crucifying local workers and trade creditors.
A publicity sanction, by contrast, is not subject to these constraints because monetary worth is not in issue; what matters is the corporate defendant's reputation. And once the focus shifts to reputation we become concerned with something which transcends jurisdictional borders. The reputation of a subsidiary like Browning Arms Canada cannot be divorced from that of a parent company like Browning Arms U.S.; it stems from identical organizational roots.
Thus, a publicity sanction of appropriate design would be aimed not only at the local populace but also at the transnational range of people whose attitudes influence and shape the Browning Arms image in Canada; advertisements would need to be placed in leading U. S. as well as Canadian newspapers.
Nonetheless, adverse publicity is of more potent sanction which can punish as well as spur internal compliance.
A sanction well-suited for this purpose would be the punitive injunction, a criminal variant of the civil injunction. A punitive injunction could be used not only to require a corporate defendant to revamp its internal controls but also to do so in some punitively demanding way. Instead of requiring a defendant merely to remedy the situation by introducing state--of--the--art preventive equipment or procedures, it would be possible to insist on the development of innovative techniques. The punitive injunction would thus serve as both punishment and super-remedy.
One advantage of an interventionist sanction like the punitive injunction is that it can side-step the difficulty of trying to impose an effective fine on the local subsidiary of a multinational. The thrust of a punitive injunction is not exaction of money but improving internal compliance. Consequently, it becomes possible to impose a stiff sentence on a local subsidiary without financially crippling it.
For example, a company like Browning Arms Canada could be required to make extensive and innovative changes to its antitrust compliance system without imposing any heavy financial cost. Managerial time does cost money, but this cost is hardly likely to cause a liquidity crisis in the way that a hefty fine so easily could.
Another plus is the capacity to pressure companies into smartening up their compliance policies and procedures. Take the Digital export tangle. Instead of imposing a monetary penalty and hoping for a revitalized compliance effort, an injunctive approach could be used to ensure that such a reaction occurs.
In particular, the company could be required to revise its screening procedures, to use its international facilities to audit the destination of products supplied, to report back to the enforcement agency at periodic intervals and, if necessary, to have those reports verified by an independent monitor.
The punitive injunction would also help to promote individual accountability where an enforcement agency has little chance of investigating and successfully prosecuting suspected personnel. Let us assume that in the McDonnell-Douglas case the charges against the four top executives were dropped because the evidence was believed insufficient to prove guilt beyond a reasonable doubt.
On that assumption, the Justice Department was in a relatively weak bargaining position; the only criminal chip it then had was the prosecution of the company, and that chip was of limited value given that the sentence would almost certainly be a fine.
But what if the stakes had been different, with the company at risk of punitive injunction? Bargaining in the shadow of that kind of sanction, a Justice Department with any backbone would hardly settle for a pay-off but would insist on internal disciplinary action against all relevant personnel, including the four executives charged. Promising as punitive injunctions are, the objection inevitably will be raised that, as compared with fines, they are an inefficient sanction because of the extra monitoring costs involved.
In response, two points should be made. First, we tolerate the high costs of imprisonment because fines of sufficient deterrent or retributive weight cannot be paid by most individual offenders; similarly, we should tolerate the enforcement cost of punative injunctions because fines of sufficient deterrent of retributive weight against corporations are bound to have intolerable spillover effects on workers, consumers, and shareholders.
Second, unless something like punitive injunctions are made available, we face the ludicrous situation that, in the context of corporate regulation, the criminal law has less bite than the civil. If that is efficiency, then the concept is unworldly.
Brent Fisse is Reader in Law at the University of Adelaide, Australia.