Corporate Criminal Compliance: When an Executive Commits a Crime

Among all legal liabilities, criminal liability is definitely the most severe one, and it will make the corporation to face the penalty of “unbearable heaviness”. It is highly possible that the corporation will not only be imposed a heavy fine, but also go bankrupt in reputation and lose commercial opportunities. Therefore, the criminal liability shall be regarded as the "red line" in the corporate compliance practice and strictly prevented.

However, the corporation relies on its agents, namely the executives, to realize its intention and capacity. Therefore, under what circumstances shall the crime committed by executives be recognized as individual crime? Under what circumstances shall it be defined as a corporate crime? Clarifying their relationships helps to prevent corporates from getting involved in criminal disputes by executives' personal conducts.

• Corporate criminal liability

As a form of business entity, corporation plays an important role in the modern economic life. Once a corporate is engaged in committing crimes, its damage to the society is often bigger than those individual crimes. Therefore, as early as in the middle of the 19th century, the common law countries established legal punishment rules for corporate crimes by court decisions. Then the continental law countries, for example France and Japan, recognized corporate criminal capacity as well. The Code Pénal Français effectuated in 1994 also explicitly stipulate rules for corporate crime in its chapter of general principles.

Chinese criminal law adopts the concept of "crime committed by entity". The concept of "entity" in Chinese criminal law is broader than that of corporation, which not only includes corporations, enterprises and other legal persons with independent capacities, but also some other organizations which do not enjoy the status of legal persons. And only the criminal code can define the criminal liability of an entity.

In the crime committed by an entity, the "entity" is actually a legally recognized “person”, therefore the realization of its intentions and behaviors shall be conducted by its members. In most cases, the individuals who may represent the intention or act as the entity are the executives. Therefore, the will and behavior between the entity and the executive has a dual possibility because of their subtle relationship.

• the punishment of corporate crime

Currently, the prevailing international practice of the punishment for corporate crime (the crime committed by entity) is dual punishment system, which means imposing criminal penalties in the form of monetary fines on the entity in one hand, and imposing prison sentences on the relevant individuals in the other hand.

Under the Chinese criminal law, the prison sentence is imposed on “the person in charge who has the direct responsibility" and “the other persons who are directly responsible” for the crime. In accordance with the law, “the person in charge who has the direct responsibility" is usually the person who makes decisions and commands, gives approvals, instructions and connivances. The “other persons who are directly responsible" refers to the corporate members who play a bigger role in the corporate crime, which can not only be the executives, but also the employees of the entity, including those hired and employed by the corporation.

• when shall the executives be criminally liable for crimes committed by entities?

- bear direct responsibility for the criminal acts of the entities

In general, the senior executives in the entity may represent the will of the legal person, therefore, it is highly possible that their individual behaviors will convert into corporate behavior in a crime. If the senior executives are directly responsible for the crime, they may not escape the punishment on behalf of the entity. However, what is worth mentioning is that under the dual punishment system, senior executives bear the liability of directly responsible executives, which is lighter in punishment in case of criminal responsibility in individual crimes.

- If the crime is not recognized in criminal law as corporate crime, it will be regarded as individual crime

The constitution of corporate crime can only be stipulated by the criminal law. If the entity has implemented an act which is not recognized as a corporate crime in the law, the principle of nulla poena sine lege (Latin for “no penalty without a law”) shall be applied. For example, according to the Chinese Criminal Code, the crime of loan fraud can only be committed by individuals, therefore, only the person who is directly responsible for the organization, planning, and implementation of the loan fraud shall be criminally convicted.

- when the corportation is CHANGED, the persons of the original entity shall bear the criminal liability

Where a corporation is separated, merged, restructured, cancelled or declared bankrupt according to the law, no matter whether the successor exists, the persons of the original entity who are directly responsible for the crime shall bear the criminal liabilities.

• can senior executives be “exempted” from criminal liability for corporate crimes?

If an executive who has actual control or control power over the entity is not directly related to the criminal act committed by the entity, i.e., the executive does not participate in the planning and organization of the crime, or does not allow the occurrence of the crime committed by the entity or later recognize the crime, then the executive shall not be deemed to be responsible. In practice, the following elements should be taken into consideration:

 (1) Awareness of the illegal activities. It is irrelevant whether the person is aware of the legal consequence of his behavior, however, the key point is whether he is aware of the fact itself. Meanwhile, the definition of “awareness” is not limited to prior knowledge of the crime. The knowledge of the relevant persons committing or to commit a crime is also a type of “awareness”, however allowing or acquiescing its occurrence, can also be considered as "awareness".

 (2) Connivance, acquiescence or subsequent ratification of the illegal activities. The determination of the legal liability of a crime committed by an entity is different from that by an individual. The ratification of connivance, acquiescence or subsequent ratification, can convert a personal intention or behavior into the intention or behavior of an entity. The director shall not be personally responsible for the crime, if he neither participates in his subordinates’ criminal activities, nor shielding or ratifying subsequently.

 (3) Benefits from the criminal activities. Although whether there is actual profit is not the core element of judging the criminal liability, it can prove the degree of executives' participation in criminal activities in reverse. If executives do not get the benefits of criminal activities and have no benefits, it can indirectly show that executives do not have the intention to engage in criminal activities.

• under what circumstance shall the corporation be criminally liable for the acts of its exectutives?

Whether the criminal acts of senior executives shall be identified as a crime committed by an entity or an individual crime needs to be distinguished in accordance with the principle of consistency between subjective and objective elements, namely:  (1) whether the criminal act is committed for the purpose of illegal profit for the entity; (2) whether the criminal act is made by the entity’s decision-making body according to the entity’s decision-making procedure; (3) whether the criminal act is carried out in the name of the entity; (4) whether the act is carried out in the name of the entity; (4) whether the act is within the scope of executives’ duties, or related to the business scope; (5) Whether the benefits derived from illegal activities attribute to the entity.

If senior executives of a corporation take advantage of their occupational authority power to act on behalf of the corporation through normal working procedures and attribute the profits to the corporation, the corporation shall bear the criminal liability. For example, in most crimes of false issuance of VAT special invoices, it is often the supervisor or legal representative of the company that instructs the financial personnel to falsely issue or purchase VAT special invoices in the name of the entity, which is used to the deduction of the tax bill of the company, and the profits are attributed to the company. This kind of behavior is often recognized as the crime of false issuance VAT special invoices committed by the entity.

• circumstances where the corporation should not be criminally liable

- crimes committed by senior executives against the legitimate rights and interests of corporation.

For example, in the case of crimes like embezzlement, job occupation, misappropriation of public funds, the corporation itself is the victim of the crime. Therefore, the occupational crimes committed by the executives, against the interest of the corporation, shall not be convicted into corporate crimes.

- piercing the corporate veil.

When the corporations, enterprises or institutions are set up to implement criminal activities, or after their establishment, their main activities are to implement crimes, then these acts shall be convicted as individual crimes, as they do not meet the purpose of the unit, and have illegal purposes to avoid legal responsibilities .

- usurping the name of the corporation.

Whether the crime is committed in the name of the corporation is one of the core elements to determine whether the corporation shall bear the liability, however, not all of them are corporate crimes. In accordance with the judicial interpretations of the Supreme Court On the Application of Law in the Case of Unit Crime in 1999: if the illegal profits are divided secretly by individuals who usurp the name of the entity, the individuals shall be punished in accordance with the provisions of the criminal law. Therefore, it shall not be convicted as an entity crime if the illegal activities are committed under the guise of the unit or usurpation the name of the unit in the purpose of making benefits for individuals.

- beyond the business scope of the entity.

The corporation is only responsible for the behavior within its business scope or business-related activities and shall not be criminally liable for the individual acts of its executives, if they are irrelevant with the business of the corporation. Although the corporation can act beyond its registered field, as long as it is related to its business or capacity. However, the individual behaviors of the directors with no substantial relevance to the business scope shall not be deemed as the acts of the entity.