Corporate Tax Departments and the New Focus on Corporate Criminality

In little more than a year, a "Perfect Storm" combination of events - earnings restatements, SEC inquiries, criminal investigations, indictments and convictions, sweeping legislative and regulatory changes, political pressures, and media scrutiny -have reshaped the relationship between corporations, corporate management, and the criminal law.

Before large portions of the developed world had heard of Enron, the criminal law was a relatively bright line, clearly visible to someone wearing a "white collar" to work. Responsible corporate employees knew that it was a crime to sign a false document submitted to a financial institution or to the government, to cause false statement of corporate income or expense on financial statements or tax returns, or to obstruct or impede a government inquiry. While the government routinely prosecuted garden-variety securities, accounting, or tax fraud cases, the notion that most senior corporate officials would run afoul of potential criminal exposure was far from the minds of most such individuals.

Now the world is different. One individual's misconduct, or even poor judgment, can place an entire enterprise at risk. The most seemingly innocuous email - for example, instructing employees to comply with record destruction policies - can be catastrophic to a corporate entity and lead to imprisonment for senior management. The Sarbanes-Oxley Act, enacted in the summer of 2002, imposed broad new requirements on management and directors, where missteps can result in felony indictments. Financial statements, tax returns, and even corporate press releases are examined under a bright new light, with microscopic lenses. Whistleblowers and informants can lurk everywhere.

Recognizing the new environment, this article discusses some topics every corporate tax director or staffer should know. To set things in context, it begins with a brief description of relevant Department of Justice policies relating to the prosecution of business entities and important components of the U. S. Sentencing Guidelines concerning organizations. The factors that the Department considers in deciding whether to charge a corporation with one or more criminal offenses, and certain key provisions of the Sentencing Guidelines, have reshaped the relationship between companies and their employees when a criminal investigation commences.

Next, the article discusses criminal law concepts that are noteworthy in the context of corporate criminal matters. It makes manifest that the criminal law's reach is broader than one might think. To be sure, every corporate tax director knows that it is a crime for one, with knowledge and willfulness, to sign a false tax return, to engage in conduct aimed at causing the filing of a false tax return, or to fabricate, falsify, or conceal material information during the course of an IRS audit. But there are other crimes, and other ways in which the government seeks to prove criminal conduct, that are increasingly relevant given the new focus on corporate criminality. Four criminal law concepts are illuminated: the breadth of the "Klein conspiracy" offense, the notion of aiding and abetting, the aspect of criminal intent called "willful blindness," and the broad scope of the federal money laundering statutes.

Moreover, an important defense to an allegation of criminal conduct - the "reliance on professional adviser" defense - is significant as well. If there is a potential for criminal tax charges within an organization, individuals on the "transactional" side (and the corporation as an entity) are likely to argue that all relevant information was known to personnel in the tax department, and it was those individuals who made the decision about how to report a particular item. Thus, the reliance defense, perhaps helpful to an overall corporate defense, will spotlight the conduct of a corporate tax department.

Finally, the article describes certain preventative steps that a company, and a corporate tax department specifically, can take in order to put itself in a position to prevent the occurrence of events that, however innocent they might have seemed at the time, might appear as crimes to a prosecutor or federal agent with search warrant or subpoena in hand. These include implementing or revising company compliance programs, including modifications in light of certain provisions of Sarbanes-Oxley, and basic instructions on reacting to an investigation and avoiding mistakes.

I. DOJ Policies on Corporate Prosecutions and Sentencing Guidelines for Organizations

It is an elementary principle of criminal law that companies, not just individuals, can be charged with a crime. Department of Justice guidelines on corporate prosecutions make this clear:

Corporations are "legal persons," capable of suing and being sued, and capable of committing crimes. Under the doctrine of respondeat superior, a corporation may be held criminally liable for the illegal acts of its directors, officers, employees, and agents. To hold a corporation liable for these actions, the government must establish that the corporate agent's actions (i) were within the scope of his duties and (ii) were intended, at least in part, to benefit the corporation. In all cases involving wrongdoing by corporate agents, prosecutors should consider the corporation, as well as the responsible individuals, as potential criminal targets.1

Most prosecutors prefer to charge individuals with a crime, since corporations cannot serve time in prison. But for many companies, the collateral consequences of a criminal conviction can be devastating - potentially draconian criminal fines, possible debarment from government contracts, and negative publicity and damage to brands and goodwill.

In 1999, the Department of Justice issued a set of guidelines on the prosecution of corporations, and in 2003, the guidelines were revised and updated.2 The guidelines highlight factors that federal prosecutors consider in deciding whether to bring criminal charges against a corporation. They provide that no single factor is determinative, but rather a prosecutor's decision whether to indict a corporation as an entity should be based on all relevant facts and circumstances. The relevant factors can be summarized, as follows:

The nature and seriousness of the offense, including the risk of harm to the public, and applicable government policies and priorities, if any, governing the prosecution of corporations for particular categories of crime (such as special initiatives against accounting fraud, health care fraud, procurement fraud and tax fraud).

The pervasiveness of wrongdoing within the corporation, including the complicity of corporate management.

The corporation's history of similar conduct, if any, including prior criminal, civil, and regulatory enforcement actions.

The corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection and the disclosure of internal investigative reports.

The existence and adequacy of the corporation's compliance program.

The company's remedial actions, including any efforts to implement an effective corporation compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies.

Collateral consequences, including disproportionate harm to shareholders, pension beneficiaries, and employees who were not involved in the offense, and the impact on the public arising from the prosecution.

The adequacy of the prosecution of individuals responsible for the corporation's malfeasance.

The adequacy of remedies such as civil or regulatory enforcement actions.

In addition to these policies, the U. S. Sentencing Guidelines play a role in the new landscape of corporate crime. Sentences in all federal criminal cases are pursuant to the Guidelines. In most white-collar criminal cases, the Guidelines require a mechanical calculation of the period of incarceration for individual defendants, and fines for organizations, based largely on the amount of money involved. Federal judges have little discretion to sentence a defendant outside the mandatory range. In nearly all criminal tax cases, individual defendants are sentenced to a period of incarceration.

With regard to organizations (which can include corporations, labor unions, trusts, or any legal entity), there is a "scoring" process that culminates in the determination of a fine. Fines can range from minimal amounts to $300 million or even more, depending on various circumstances. Factors that can exacerbate the amount of the fine include the involvement of high level personnel in the offense, prior corporate misconduct, and obstruction of justice during the investigation. Importantly, one potential mitigating factor is the presence of a corporate compliance program.3

The DOJ policies on the indictment of corporations and the Sentencing Guidelines have changed the relationship between companies and their employees in the context of a criminal investigation. Before the last decade, the reaction of many corporate clients had been to stonewall against potential charges and "protect our people" as much as possible. Obviously, no company wanted to get indicted. But quite often, company counsel would work with counsel for individual employees, whose legal fees were paid by the corporation, in an attempt to present a united, and it was hoped, overwhelming defense to potential criminal charges, such that the government would decide at some point to abandon a criminal case and seek civil remedies.

Now, times are different. First, companies realize that a detailed compliance program is essential. Such a compliance program needs to be clear, well-conceived, in writing, and preferably reviewed by...