Punishments that Fit the Corporate Crime

May 28th, 2015 by Phil Mattera

gm-ignition-switch-accident-victims_0Now that several large banks have pled guilty to criminal charges, the next addition to the list of corporate felons could be General Motors, which is reportedly negotiating a settlement with the Justice Department to resolve an investigation of the company’s concealment of an ignition-switch problem that has been linked to more than 100 deaths.

Another criminal investigation is targeting Takata Corp., whose defective airbags recently prompted the record recall of 34 million vehicles. Its airbags can explode violently when activated, shooting shrapnel that has been tied to six deaths and more than 100 injuries.

In reporting the possibility of a plea by GM, the New York Times said the company is likely to be hit with a record financial penalty, suggesting that this will be the main punishment faced by the automaker. Presumably, Takata will also have to fork over a substantial sum.

Federal prosecutors have been extracting larger and larger amounts from companies in settlement deals, but are monetary penalties enough when it comes to corporate misconduct that results in serious physical injuries and loss of life?

Of course, there is a long tradition in the tort system of attaching dollar amounts to victims of business negligence, but when the wrongdoing is serious enough to warrant criminal charges, the culprits should not be able to buy their way out of jeopardy.

Ideally, such cases should also include the filing of charges against individuals, especially top executives, who could face the loss of their personal liberty. In most instances, however, prosecutors say it is too difficult to prove individual culpability.

How, then, could companies be punished beyond financial penalties (which are often easily affordable and tax deductible)? Short of using the corporate death penalty (charter revocation), which in the case of a large firm such as GM would cause economic upheaval, there are other options to consider.

It’s frequently said that corporations cannot be put in prison, but there are ways of restricting their freedom to operate. These involve excluding them from certain markets or putting restrictions on the scope or size of their business. Such penalties already exist in the form of debarment from federal contracting or disqualification from certain regulated activities.

The problem is that prosecutors and regulators are wary of making full use of these sanctions, as seen in the fact that the banks that recently pleaded guilty to criminal charges of rigging the foreign currency market were promptly given waivers by the SEC from rules that would have disqualified them from the securities industry.

Perhaps the bank offenses were too abstract to engender much public anger over the way they were allowed to escape some of the more serious consequences for their crimes. But I’d like to think that companies found to have caused death and dismemberment will be expected to do more than write a check.

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