Imagine that you are the president of a corporation, reviewing your mail and phone messages early one morning. A concerned secretary summons you to your office door.

To your shock, you find a federal marshal serving you, as representative of your corporation, with a summons requiring your corporation to face criminal charges. When you are able to contact your attorney, you learn that the charges are the result of the criminal activity of one of your employees committed without your corporation’s knowledge or consent.

As unsettling as this scenario may seem, it is a real possibility in today’s corporate world as corporations may face prosecution in both state and federal court for the criminal acts of their employees. As corporate leaders, it is imperative to understand when a corporation may be responsible for an employee’s criminal acts, what steps can be taken to avoid such charges and how to respond to criminal charges, should the occasion arise.

To deter criminal conduct, a corporation should institute an effective compliance program and require the cooperation of all corporate employees in carrying out the program. If a criminal act is discovered, the corporation must act quickly to institute corrective measures and must avoid any acts that may be seen as an obstruction to the investigative process.

A corporation can thus best protect itself from the criminal acts of its employees through the use of preventative measures that will act to discourage the criminal activity, and the use of appropriate mitigating actions once such criminal activity is discovered.

A corporation’s responsibility for an employee’s criminal act is derived from the doctrines of respondeat superior and vicarious liability. In essence, the doctrines hold that the supervising party is responsible for the actions of their employees because of the relationship between the parties.

Generally under federal law, a corporation can be held criminally liable for the act of its agent or employee when the individual is acting within the scope of their employment, and the corporation benefits at least in part from the illegal act. When these two elements are present, the illegal act is imputed to the corporation.

This liability may be imposed even if the act was committed by low-level employees who themselves were not indicted. In fact, such liability may even be imposed when the employees were acting contrary to the directions of the corporation itself.

Liability thus does not depend on whether the corporation authorized the illegal acts or even knew of those acts. It rests instead on whether the employee was acting within the “scope of his authority” (essentially acting in the course of his normal and ordinary duties), and the corporation benefits at least in part from the illegal act. The concept of “benefit” has been given a very wide meaning and would impute liability to the corporation even when the employee is obtaining a direct benefit from the illegal conduct.

Generally, Michigan law will impute liability on a corporation in the case of a lower level employee if the act was undertaken by the employee within the scope of their employment, and the criminal statute that was violated by the employee allows for imputation of corporate vicarious liability.

The Model Penal Code takes a similar position to the Michigan courts, allowing conviction of a corporation for the criminal act of its agent when the statute provides for such imputation, and the agent violates the law within the scope of his/her responsibility and on behalf of the corporation.

In addition, generally under both federal and state law corporations can be held criminally liable for criminal acts committed by high management personnel where basically the acts committed are those of the corporation. In addition, the corporation could be found liable where such high management personnel deliberately disregarded or condoned or tolerated criminal activity, under the willful blindness doctrine.

This doctrine applies to situations where such management personnel become suspicious of criminal activity within the corporation, but take no affirmative steps to investigate or interfere with the activity. The deliberate avoidance of such investigation will subject the corporation to liability.

There are, however, steps that can be taken that can possibly avoid the laying of charges against the corporation, or if such charges are laid reduce potential penalties for such convictions.

In 2003, through then-Deputy Attorney General Larry D. Thomson of the U.S. Department of Justice issued a memorandum (Thomson Memorandum) to U.S. Attorneys setting out guidelines to aid prosecutors in determining whether a criminal prosecution is warranted against a corporation.

The Thomson Memorandum makes clear that in order to reduce the likelihood of a criminal prosecution, corporate officials should take affirmative steps to prevent criminal conduct from occurring in the corporate setting.

Included in those guidelines is the existence and adequacy of a corporate compliance program. Further, even if charges are laid by taking appropriate steps in advance, the penalties for criminal conduct can be effectively reduced.

Currently, the applicable U.S. Sentencing Guidelines for Organizations provide for a reduction in penalty if the “offense occurred despite an effective program to prevent and detect violations of law.” Although there are proposed changes, presently there are a number of suggested elements in the guidelines that help define an “effective program” including:

1. The establishment of procedures and standards likely to reduce the occurrence of criminal conduct. These standards should be appropriate for the size of the corporation and the industry in which it operates.

2. The assignment of a high-level manager to assure adherence to the policies. The official in this oversight role should be selected carefully, to assure they are law abiding and honest.

3. Training programs should be instituted within the organization to communicate the standards and practices to staff. These materials should be tailored to the target audience.

4. Taking reasonable steps to achieve compliance with its standards through the use of monitoring and auditing systems designed to detect criminal conduct and by having in place a proper reporting system.

5. Disciplinary measures should be taken when the standards or policies are violated.  The penalties should be serious enough to deter future violations.

An effective compliance program must be in writing, and should emphasize the importance of integrity, honesty and ethical conduct in the corporation’s dealings. The training programs must accentuate the relevant criminal law, government regulations and the standards of the industry.

The appointed compliance official must have immediate access to corporate counsel so that any potential violations can be raised promptly. While corporate directors are not expected to administer the legal compliance programs, they should review the programs periodically and be satisfied that adequate protections are in place.

The benefits of a strong compliance program include the deterrence of criminal acts, a reduction of fines under the federal sentencing guidelines, an enhanced corporate image, lower insurance premiums and tax incentives. Further, and of greatest importance, a corporation may be able to convince a prosecutor not to indict, if along with other factors an appropriate and effective compliance program is already in place.

Once criminal activity is discovered in the workplace, there are certain actions that can increase a corporation’s liability. Under the federal sentencing guidelines, these include involvement or tolerance of criminal activity; prior history; violation of an order; obstruction of justice; if a high level employee participates in or condones, or was willfully ignorant of violations; if the crime is a repeat offense or a violation of a probation order or a judicial order, or if the organization obstructs justice during investigation, prosecution or sentencing.

When the conduct is discovered, the corporation must act promptly. Legal counsel should be notified and a proper corporate internal investigation should be undertaken to determine exactly what happened. Corrective measures should then be instituted to mitigate any further damage to the injured parties.

In determining whether charges are appropriate, the Thomson Memorandum specifically includes considering whether there was timely and voluntary disclosure of the wrongdoing and willingness to cooperate, and any remedial actions taken following the discovery of criminal activity.

The Sentencing Guidelines also provide for mitigation of penalty where there has been reporting of the offense to appropriate government officials, full cooperation and acceptance of responsibility. Therefore, by taking prompt and effective action following the discovery of criminal activity, a corporation may obtain a reduction of sentence if charges proceed, or may avoid criminal prosecution entirely.

Michael H. Gordner is senior counsel at 300-attorney Miller Canfield where he focuses on litigation and dispute resolution, Canadian law, criminal defense, and corporate compliance. Licensed to practice in Ontario, Canada and in the state of Michigan, his experience in the practice of criminal law covers over 31 years. He can be reached at 313-496-7663 or gordner@millercanfield.com. For more information on Michigan-based Miller Canfield, visit www.millercanfield.com. Summer associate Martha M. Rabaut assisted with this article.