Why punish corporations for their employees’ crimes?

Under English common law from the eleventh century until 1846, an inanimate object or an animal that caused a person's death would be forfeited, becoming what was referred to as a "deodand." Thus, when William Swan fell into a well and drowned in Wigston, England in 1397, the coroner ordered the destruction of the well. Likewise, chattels that caused a person's death were given to God or to his representative on Earth, the monarch.

Such deodands also were offered up to the relevant authorities in colonial America. When George Bollington died from falling off a horse in Virginia in 1664, the horse was forfeited to the governor. And as William Bradford recounts in Of Plymouth Plantation, when the colonist Thomas Granger was executed for bestiality in 1642, the farm animals that he had abused were sacrificed alongside him.

From today's perspective, punishing inanimate objects and animals for criminal acts that they do not have the agency to have committed seems absurd. Yet what is one to make of Goldman Sachs' recent settlement with the US Department of Justice, whereby it will pay a $2.8 billion fine for its work – including aiding in the embezzlement of billions of dollars – with the corrupt Malaysian government fund 1Malaysia Development Bhd (1MDB)? If one views criminal culpability as a matter involving individual human beings, it seems odd that an inanimate legal construct – a corporation – could be the one found guilty of committing a crime.

In the late eighteenth century, the British jurist Sir William Blackstone observed that, "A corporation cannot commit treason, or felony, or other crime." Yet by the early twentieth century, firms had come to be held liable for their employees' criminal as well as civil misdeeds. Because this didn't change the fact that a corporation can neither form criminal intent nor bear the burden of a punishment, it meant that punishment would be borne mainly by stockholders and employees. This suffering inflicted on innocent parties was by design, rather than by accident, as in cases where a criminal's family suffers as a result of his punishment.

In addition to recognising that modern corporations have become a deodand for punishing malfeasance, Albert Alschuler of the University of Chicago Law School argues that corporations also can be viewed as a type of "frankpledge." In Anglo-Saxon England, a frankpledge was a collection of men who were "bound together and held responsible for delivering anyone in any of their ten households who had committed a crime. If the criminal escaped, all ten members of the tithing were fined.

"Punishing corporations for the bad behaviour of individual employees might be viewed as a variant of this mechanism, insofar as it creates an incentive for employees and stockholders to monitor employee behaviour. But a frankpledge involves a trade-off between efficiency and justice. Should we really punish whole groups for criminal actions carried out by individuals? And should we really expect such a regime to lead to more monitoring and accountability, rather than a kind of moral hazard whereby members conclude that they might as well misbehave if they could be punished anyway? If an employee believes that she might be subpoenaed, she may be less apt to record phone calls and save emails.

True, indirectly punishing criminal employees by punishing the corporation might make sense in cases where justice is handed down immediately. But all too often, the guilty individuals are long gone by the time any punishment is levied. Similarly, requiring employees and shareholders to compensate for the damage caused by a crime that they did not commit but have benefited from also could make sense, but only if the fine is transparently related to the perceived benefit.

Some would argue that it is reasonable to fine a corporation because an individual employee who is responsible for wrongdoing is unable or cannot be forced to make restitution. But the fact that the guilty party cannot pay hardly justifies forcing others to do so instead.

At the end of the financial crisis that began in 2008, US authorities fined banks a total of $243 billion, all as punishments for crimes committed by employees. Between 2008 and 2018, only one top banker was sentenced in the United States for his role in the financial crisis. The fact that two Goldman Sachs bankers have been charged in the 1MDB case is an exception that proves the rule. (One has pled guilty and awaits sentencing; the other has pled not guilty and awaits trial.)

Why do policymakers and the justice system prefer to impose criminal penalties on abstract legal constructs instead of going after those who actually committed the crimes? One answer might be that this approach gives regulators more power over the entities they regulate. Another is that prosecutors only bring cases they can win, and it is simply easier to go after the whole corporation than it is to prove who bears responsibility for which misdeeds. Jurors, too, probably find it easier to pronounce abstract entities guilty than to condemn a person to prison or a loss of livelihood. Obviously, it takes corporate employees to commit corporate crimes. But as long as they collude, no one goes to jail.

Willem H Buiter is Visiting Professor of International and Public Affairs at Columbia University.

Anne Sibert is Professor of Economics at Birkbeck, University of London.

Disclaimer: This article first appeared on Project Syndicate, and is published by special syndication arrangement.