Criminal Law and Business

1. Criminal Law and Business Chapter 5 Meiners, Ringleb & Edwards The Legal Environment of Business, 12thEdition

2. Crime and Crime Categories Crimes & Elements of Crimes Defenses & Constitutional Rights Evidence Prosecution Process White Collar Crime Sentencing Guidelines and Compliance Chapter Issues

3. Crime • Crime: Positive or negative action that violates a penal law • Not civil law • Act against a state or federal government or even local government • Congress and state legislatures decide the criminality of actions – mostly statutory • Governments determine punishments • Seen more and more in the business context • Computer and technology have created new versions of old criminal laws • e.g. Unauthorized entry into computer systems is the new version of the old “breaking and entering” laws

4. Crime Categories • Felonies more serious than misdemeanors • Classifications (Class A, Class B) and degrees (first degree, second degree) denote seriousness of criminal charge • Violent crimes – murder, manslaughter • Non-violent victim crimes – vehicle theft, burglaries • Victimless crimes – possession of illegal drugs • White collar crimes – embezzlement, bribery, fraud • Punishment depends on the category under which a person is convicted • Some crimes punished by death • Imprisonment/Fines • Unable to own a firearm • Removal from public office • Disqualified from holding office or voting

5. Crimes and Elements of Crimes • Government agencies decide who will be charged with a crime. • Prosecutors receive reports of alleged crime, & results of investigation. • Prosecutors then decide whether or not to bring charges. • Not all claims of criminal activity are investigated. • Politics & personal preference may come into play in decisions by prosecutors. • Process is not perfect. • Criminal negligence: “a degree of carelessness amounting to a culpable disregard of rights and safety of others” • Example: Drunk driver drives wrong way down highway and kills a person in an accident • Requirements for prosecution and conviction: • Actus reus – the guilty act • Mens rea – criminal intent

6. Constitutional Right: Fifth Amendment • Miranda Rights must be read if a person is accused of or held in suspicion of a crime • Right to remain silent (under the 5th Amendment) • Statements made can be used as evidence against you in court • Right to be represented by counsel • If accused cannot afford an attorney, one will be provided by the court

7. CaseCommonwealth v. Angelo TodescaCorp. • Gauthier, a truck driver, drove dump truck full of asphalt for Angelo Todescato a highway construction site near a busy intersection. • Police officer directing traffic was run over and killed as Gauthier backed up to deliver asphalt. Back-up horn on the truck was not working. • Gauthier and his employer, Todesca, knew horn wasn’t working – Violation of company safety procedures. • Gauthier was charged with various driving offences. He paid a fine and had driving privileges restricted. • Commonwealth of MA charged Todesca w/vehicular homicide. • Jury convicted company and fined $2,500. • Appeals court reversed the conviction. • Commonwealth appealed. • Commonwealth must prove the individual whose conduct was used to charge corporation with a crime was placed in the position by the corporation. (Continued)

8. CaseCommonwealth v. Angelo TodescaCorp. • To prove corporation is guilty of criminal offense, must prove: • (1) individual committed a criminal offense; • (2) at the time of committing offense, person “was engaged in some particular corporate business”; and • (3) individual had authority to act for corporation on its behalf to carry out particular business when offences occurred • Defendant said corporation can’t be involved in motor vehicle homicide since “corporation” cannot “operate” a vehicle. • HELD: Judgment of trial court affirmed. • Because corporation is not a living person, can only act through its agents. Liability is therefore vicarious • Otherwise corporations would never be liable for any crime. • Corporations can be held criminally liable for acts performed by employees “within the scope of their employment” and “on behalf of the corporation”.

9. Defenses • Raise doubts in jurors’ minds through alibi • Presents other evidence that crime was not committed • Affirmative Defenses: Even if prosecution’s claims are true, other facts prevent the claims from constituting the crime. • Intoxication and insanity (rarely successful). • Improper procedure in the criminal prosecution • Statute of Limitations runs (time varies by crime) • Unsolved murders – statute of limitations may never end • Statute of limitations can “toll”, to stop the running of time (e.g. if criminal flees country to avoid prosecution) • Action was justifiable, i.e. self defense with reasonable force • Self-defense in violent crimes cases (use of force justifiable to protect oneself against another) • Entrapment (Law enforcement sets a trap to lure someone into committing a crime he/she had no intention of committing • This can be tricky as a defense.

10. Evidence • Strict standards for gathering and presentation at trial • Evidence was handled properly; called “chain of custody” • If improperly obtained or presented, evidence is excluded (under procedural due process); Called the exclusionary rule • 4th Amendment protection • May be referred to as “fruit of the poisonous tree” • Authorities may • Search property • Seize documents and other physical items • Warrantsare usually needed for search of property, persons, or seizure of property. • Warrant issued by a judge or magistrate • There is a “hot pursuit”exception. • Law enforcement officials must show probable causeto a judge to obtain a warrant.

11. CaseUnited States v. Young • Under IRS regulations gasoline/diesel fuel may be sold tax free if for marina use. • Marinas sell tax-free fuel by obtaining a “647 certificate” from the IRS. Young obtained a certificate for his marina. • IRS believed he never used fuel for marina purposes, he sold it in cash deals to truck stops and service stations that should have paid federal taxes on the fuel. • IRS also believed Young shipped illegal money he made by Federal Express. • FedEx agreed to let the IRS x-ray packages shipped by Young. • Found large amounts of cash inside. • Based on x-rays, IRS obtained a warrant to seize and open Young’s packages – indeed they contained the suspected cash • At trial, Young moved to suppress the evidence • Said that IRS did not originally obtain a warrant to x-ray FedEx packages. • Trial court rejected Young’s motion • He was convicted. • He appealed the trial court’s decision. (Continued)

12. CaseUnited States v. Young • HELD: Judgment affirmed. • No reasonable person expects to retain privacy after signing an air bill warning of carrier’s authorization to inspect packages. • FedEx told customers (1) do not ship cash, and (2) we may open and inspect your packages at our option. • Because of this, Young had no expectation of privacy of packages being x-rayed by IRS agents with FedEx permission. • Young assumed risk that FedEx might consent to a search. • No offense to Young’s 4th Amendment rights.

13. Prosecution Process • Occurs when prosecuting attorney has enough evidence to make criminal charges • Will be either a misdemeanor or felony • In some cases, a grand jurywill review a potential felony case. • If grand jury determines probable cause, usually it will issue an indictment against the accused.

14. Arraignment • Accused is placed under arrest based on a warrant. • In non-violent matters, accused must turn herself in, rather than be taken into custody by the police. • Suspect is booked at police station, photographed, finger printed and searched. • Chance given to the accused to contact an attorney. • Arraignment – court appearance of the accused (either before a judge or magistrate). • Accused may plead guilty, nolo contendere(no contest) or innocent. • Judge may release accused or require bail, and will set a court date. • Violent criminals, or those who court fears might flee before trial are held without bail, or bail is set very, very high. • Sometimes defendants plea bargain – allows matter to be settled under court supervision. • Defendant pleas guilty to charges or lesser charge or pleads no contest in exchange for agreed punishment.

15. Discovery • Civil Law Purpose: To reduce surprises • Both sides must turn over anything requested by other side • Criminal Law Purpose: Parties do their own investigations • Disclose only subset of what is found to the other side prior to trial • Law enforcement may be conducting investigation that defendant knows nothing about. • Under Constitution, prosecution must disclose any exculpatory evidence • Evidence which might show defendant is not guilty • The choice to disclose left up to prosecutions lawyers • Defendant in criminal case has no obligation to disclose to prosecution evidence showing guilt • 5th Amendment protects defendants • Before criminal trial, prosecution & defense exchange witness and exhibits lists.

16. Trial • TRIAL: If matter goes to trial, government attorney (often district attorney) presents prosecution’s case. • Defendant must be found guilty “beyond a reasonable doubt”. • If jury finds defendant innocent – end of matter. • Double jeopardy prevents a defendant from being tried a 2nd time for same crime. • If jury can’t agree on verdict, there is a mistrial, and prosecutor will decide whether to proceed again. • If guilty, there may be • Prison time • Jail time • Probation • Fines • Restitution to victim

17. White Collar Crime • 1939 reputed origination of term: “Crime committed by a person of respectability and high social status in the course of his occupation.” • Criminal activity for financial advantage occurring in business. • FBI estimates such crimes create $1/3 trillion in losses each year. • Most cases are against individuals; corporations may also be prosecuted.

18. White Collar Crime • Antitrust: Violation under the Sherman Act and Clayton Act. • Prison terms involved in price fixing and anti-competitive practices • Bankruptcy Fraud: Person or corporation hides or lies about assets in bankruptcy proceeding (also applies to creditors giving false information or illegal pressure to bankruptcy petitioners). • Bribery: Offer or taking of money, goods, services, etc. to influence official actions or decisions. • Counterfeiting: Copying of genuine items without authorization – money, designer clothing, other products. • Credit Card Fraud: Unauthorized use of a credit card.

19. White Collar Crime • Computer and Internet Fraud: • Credit card fraud involving a computer/internet • Unauthorized access to financial accounts • Unauthorized use of computers and computer files • Sabotage of computers • Economic Espionage: Theft or misappropriation of valuable business information, such as a trade secret. • Embezzlement: Person in position of trust takes money or property for his/her own use.

20. White Collar Crime • Environmental Law Violations: Federal (EPA) and state laws • Data fraud cases, e.g. private laboratories submit false environmental data • Hazardous waste dumping • Ocean dumping by cruise ships • Oil spills • International smuggling of CFC’s • Illegal handling of hazardous substances (pesticides, asbestos, etc.) • EPA averages 300 criminal prosecutions per year--150-200 years of prison and jail time. • Financial Fraud: Regulation of banks and financial institutions • Firms and employees subject to criminal liability • Fraud in loans, financial documents, mortgages, etc.

21. White Collar Crime • Government Fraud: Governs contracts with public agencies • Billing for goods not delivered • Double billing • Inferior goods • Government payment programs • Farm subsidies • Public housing • Educational programs • Healthcare Fraud: Over-billing and scams by hospitals, doctors ambulance services, laboratories, pharmacies, extended care facilities • Insider Trading: Person trades a security while in possession of material, non-public information.

22. White Collar Crime • Insurance Fraud: Insurance companies commit fraud, charging higher rates than allowed by state regulators. • Policy holders lie about condition of property to get lower rates. • Policy holders pad their claims to get more money. • Mail Fraud: Sending of fraudulent materials through U.S. Postal Service or using the U.S. Postal Service to communicate fraudulent activities. • Money Laundering: Hiding the truth about the origins of money, especially illegal activities. • Obligation to report income even from illegal income for tax purposes.

23. International Perspective“MULTINATIONAL EMPLOYERS AND CRIMINAL CHARGES ABROAD” • When people work in another nation, they are subject to its laws and procedures. • Sometimes also subject to their own nation’s laws as well • (i.e. U.S. applies its laws against bribery by U.S. citizens outside U.S.) • Experience of Rio Tinto – global mining and resource company with headquarters in London and Melbourne. • It is supplier of iron ore to China – has many Chinese and Non-Chinese employees working in China. • Four Rio Tinto employees in Shanghai arrested, accused of taking bribes and stealing commercial secrets. • Tried and convicted – received sentences ranging from 7-14 years. • All four (3 Chinese Nationals and 1 Australian) confessed crimes. • Criminal trials in China are held secret. • Australian Prime Minister complained about lack oftransparency. • Was rebuked by Chinese Ministry of Foreign Affairs for not respecting Chinese law & making “irresponsible comments”. (Continued)

24. International Perspective“MULTINATIONAL EMPLOYERS AND CRIMINAL CHARGES ABROAD” • Agreement signed in 1999, allows Australian representative to sit in on legal proceedings in China. However, no Australian official was allowed into the courtroom until day the verdicts were announced. • Defendants had lawyers, but would not speak to media. • Details of alleged bribes were provided when verdicts read – no evidence made public. • Damage to Chinese steel industry: Said to be 1.02 Billion Yuan ($150 Million) because judge said actions of defendants “put the Chinese steel industry into a powerless position.” • Investigation by Rio Tinto found no evidence of bribes but the four men were fired when convicted and actions termed “deplorable”. • Company did not want to “irritate” the Chinese government. • Firms doing business abroad must realize that laws can be quite different in other countries. • If foreign citizens working in those countries become involved in criminal proceeds – home country can do little to help.

25. White Collar Crime • Racketeer Influenced and Corrupt Organizations (RICO) Act • Originally an extra weapon against organized crime, esp. Mafia. • Racketeering originally meant activities, such as bribery or extortion. • Modern meaning: broadened the term to include activities such as mail fraud, etc. • Successful RICO claim receives triple actual damages + attorneys’ fees through civil claims • Now mail and wire fraud included as crimes under RICO • Government can seek injunction seizing defendant’s assets, preventing their transfer or require defendant to post a performance bond. • Government may press for imprisonment for criminal violations. • Complicated and unpredictable area of the law • Rarely applied to Mafia • Is now used in suits against persons, businesses, political protest groups and terrorist organizations

26. CaseBridge v. Phoenix Bond & Indemnity Co. • Cook County, Illinois holds public auctions for tax liens on delinquent taxpayers’ properties. County requires buyers to submit bids in their own names. Cannot use “agents, employees or other related entities” to submit bids for same property by disguising the real bidder. • Phoenix Bond and others compete to buy tax liens. • Phoenix and others sued Bridge for fraudulently getting tax liens by filing false documents. • Plaintiffs lost possible tax lien purchases. • Claimed defendants violated RICO through racketeering involving mail fraud by sending false documents related to tax lien purchases. • District court dismissed RICO claims. Held that plaintiffs were not protected by mail fraud statute since scam was not directed at them. • If there was a scam, it was directed at County & property owners (not plaintiffs) and they could have a cause of action. • Appeals court reversed in favor of plaintiffs. • Defendants appealed. (Continued)

27. CaseBridge v. Phoenix Bond & Indemnity Co. • HELD: Judgment of Court of Appeals affirmed in plaintiff’s favor. • Plaintiff asserting RICO claim based on mail fraud need not show that it relied on defendants alleged misrepresentations. • The basis of the mail fraud is a mailing that furthers a scheme to defraud – even if the mailing does not contain false information. • Here, mail was used to submit false attestations of compliance with the Bidder Rule to the County. • RICO is strictly construed. • Congress must make changes, but Court will not make interpretations to the statute and change RICO’s strict outcome. • Plaintiff may assert RICO claims.

28. White Collar Crime • Internal Fraud: • Many small businesses don’t know they are defrauded • Study shows1/4 of companies with fewer than 100 employees suffered from check tampering where company checks used for improper purposes • 21% suffered from skimming - when cash is taken before it is recorded on the books • Rigging Payroll/Falsifying Reimbursement Expenses (i.e. travel) are common • Securities Fraud: Differentkinds • Insider trading gets a lot of press • Market rigging • Theft from accounts of clients of securities firms • See chapter on Securities Regulation

29. White Collar Crime • Tax Evasion: • Failure to file tax returns • Failure to report income • Overstatement of expenses • Not reporting illegal income • IRS devotes significant resources to track down violators – jurisdiction can be international, i.e. Swiss bank accounts • See Issue Spotter “Internal Fraud” • See “Your Laptop Is An Open Book”

30. Cyber Law“YOUR LAPTOP IS AN OPEN BOOK” • Arnold arrived at LA International Airport from the Philippines • U.S. Customs officer asked him to turn on his laptop • One icon said “Kodak Pictures” • Officer opened folder; found child pornography • Arnold was indicted for felony of transporting child pornography • He protested that evidence was improperly obtained • Federal Appeals Court HELD: Evidence could be used • “Reasonable suspicion” is not needed for customs officers to search laptops • Two executives from BAE Systems (large British defense & aerospace company) handed laptops seized at the border • All data was copied from them • Justice Dept. said action was consistent with its intensified investigations into foreign corrupt payments • Individuals were not under suspicion • Government simply wanted to see info. on the computers • Similar rules apply to smart phones and electronic devises in international business travel

31. White Collar Crime • Telephone & Telemarketing Fraud: Any scheme to defraud using the telephone as means of communication with victims • Trying to persuade them to send money to scheme • Solicits people to buy goods and services, invest money or donate to bogus charitable causes • Fraud on the Internet: Is essentially the same as telephone & telemarketing fraud • Chat rooms, e-mail, message boards or Web sites presenting fraudulent solicitations to victims

32. White Collar Crime • Wire Fraud: Any electronic communication involved in illegal activities (much like mail fraud & telephone/internet fraud) • Traditionally would have been subject only to state prosecution • Now basis for federal prosecution • There is a sweeping nature to the statutes seen in cases • Includes “a scheme or artifice to deprive another of the right to honest services” • Refers to bribery or kickbacks, not rather vague failure to provide “honest services.” • Pasquantino v. U.S.: American bought liquor in U.S. and smuggled it into Canada for resale, avoiding high Canadian taxes. Since electronic communications were used that originated in the U.S., two people sent to prison for 5 years each.

33. Business Implications From Money Laundering • Example of obligations created in normal business operations • $1 to $2 trillion laundered worldwide each year • Money laundering is taking proceeds of criminal activities (i.e. drug smuggling) & transforming cash in the appearance of legitimate business. • Doesn’t attract law enforcement attention • Tony Soprano Example • Tony Soprano earns $1 million from loan sharking and drug dealing • He creates Soprano Coin Laundry, Inc. • Deposits cash into corporate bank account as income from laundry • Pays himself a salary • Looks like legitimate income

34. Elements of Control within Business Operations • Anti-money Laundering Measures (“AML Measures”) • Regulations making money laundering more difficult • Soprano’s banks must comply with federal regulations, reporting, etc. • Require financial organizations to use Know Your Customer (KYC) or Customer Due Diligence (CDD) Programs • Track It Down: Tracing asset flows – large cash transactions are suspect • Who Is Up to What?:Reporting suspicious transactions – cash deposited over certain amounts ($10,000)

35. Consequences for Non-Compliance • Failure to File suspicious activity report • Civil/criminal penalties, or both • Civil penalties – willful violation of reporting requirements • Civil penalties can be up to the greater of the amount involved in a transaction • Willful violations may lead to criminal penalties • Fines up to $250,000 or 5 years in prison

36. Sentencing Guidelines and Compliance • Controversial aspect of federal criminal law • Congress mandated that courts be given clear rules about imposing sentences for criminal law violations. • Sentencing Commission created a list of factors to consider for each conviction. • Punishment is reduced under the Sentencing Guidelineswhen company has a program in place to ensure problems won’t happen again. • DOJ has Guidelines for effective compliance programs. • Some companies have traditional accounting and financial reporting to audit committees. • Other companies hire an outsider to be on the compliance committee. • Companies have whistleblower hotlines to encourage anonymous tips. • Some European countries, such as France, prohibit hotlines saying person accused of impropriety has right to know who complained. • Supreme Court HELD: Guidelines are advisory, not mandatory, for judges to use, but judges are expected follow them closely.

37. CaseUnited States v. Allmendinger • Allmendinger, Oncale and others ran investment scam. • $100 million losses on 800 investors • Misrepresented what they were selling; pocketed lots of cash rather than investing it • When federal investigators began to poke around, Allmendinger began to hide assets. • Ringleaders were indicted by grand jury: Mail Fraud, Money Laundering & Securities Fraud • Court ordered them to freeze all accounts. • Allmendinger didn’t; transferred more money to secret accounts. • After convictions, judge imposed sentences based on Sentencing Guideline measures. • Due to size of loss, lack of cooperation with investigators by Allmendinger, and hiding his money, he was given a 45-year sentence. • Oncale was given a 10-year sentence. (Continued)

38. CaseUnited States v. Allmendinger • Appeals Court will consider whether district court committed significant procedural error in calculating guideline range and explaining sentence. If in error, sentence will be vacated and remanded for resentencing. If it did not, then appeals court will consider if sentence imposed was “substantively reasonable” under the “abuse of discretion” standard. • Allmendinger was similarly situated to co-conspirator Oncale in approach to them by government, butwere different in their responses to the government investigations. • District court gave lengthy explanation for the sentence imposed and reasons for selecting sentence it did. • Oncale was confronted by the gov’t early in the investigation. Admitted culpability and immediately agreed to plead guilty. He liquidated his assets; gave them to the govt. and cooperated extensively • Allmendinger refused to accept responsibility for his actions. Hid cash in violation of restraining order, lived lavish lifestyle with the money, oneyin violation of the restraining order, attempted to flee rightbefore the trial. • HELD: No error in Allmendinger’s convictions and sentence