1

If a CEO was largely or completely unaware of the situation within a firm and some financial crimes were committed, is the CEO held accountable, or does it have to be a major financial crime or several of them within the company?

I am wondering if the CEO is always held accountable for the financial crimes committed within an organization if one he's largely or completely unaware of the crimes committed, or if the CEO is only held accountable in a Enron-type situation. What does the law say? And what is the name of the law that's relevant here? Assume it's in the United States.

4

No. There is no such thing as vicarious criminal liability.

Anyone convicted of a crime needs to be personally involved and have knowledge of the relevant facts for co-conspirator or solicitation liability.

There isn't really a single law that says it. It is rooted in the overall structure of the criminal codes at the state and the federal level, and in the elements of each of the possible crimes.

Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7241), requires a CEO to certify that its financial statements are materially correct to the best of the knowledge of the CEO, and also that certain internal controls are, or are not, in place, to the best of the knowledge of the CEO. Regulations address whom the CEO is entitled to rely upon in acquiring the knowledge that the CEO has when certifying the disclosures that are made under the Act. And, Sarbanes-Oxley imposes duties on lawyers and others to inform he CEO of irregularities. But the CEO is not subject to criminal or civil liability without having knowledge of errors or omissions in these statements that are contrary to the certification.

6
  • 3
    Quite true, but if a CEO or other major official has a duty to be aware of such goings on, and fails in that duty through lack of due diligence, won't that impose some liability? Didn't Dodd-Frank impose some such duty on a CEO? Jul 28 at 0:50
  • 1
    @DavidSiegel Possibly liability, not, as a general rule, criminal liability, and only arising from some very specific acts.
    – ohwilleke
    Jul 28 at 0:51
  • 1
    In the financial industry our compliance training emphasized that we could go to jail under some circumstances even if we were not aware of and did not participate in a crime. I don’t think the charge would be liability for that particular crime though, and it wouldn’t be just the “boss” held liable; they could hold people throughout the company liable. Not sure how much of that was just to scare people into taking the rules seriously. @DavidSiegel
    – ColleenV
    Jul 28 at 13:10
  • 1
    @ColleenV Strict personal criminal liability for crimes without knowledge or participation (basically, without criminal intent) is essentially unheard of for serious crimes. Pretty much, it is limited to traffic offenses and the like. I would strongly suspect that you were mislead in compliance training. Fines, by all means, maybe even more serious personal criminal liability gross negligence that causes serious injury, or willful blindness. Entity criminal liability maybe. But I don't know of a situation that imposes strict criminal liability on senior execs without knowledge or involvement.
    – ohwilleke
    Jul 28 at 15:40
  • 1
    I would think it would be for reporting or process failures or facilitation maybe, not technically for the crime. It’s been a few years since I had to take that training and it didn’t stick with me. I take laws very seriously regardless. I was a military brat, and my parents had no trouble punishing us for looking like we were doing something wrong, because often that can have as large a negative impact on your life as actually doing something wrong.
    – ColleenV
    Jul 28 at 15:46
3

Always? No. Sometimes? Yes.

Corporations Law

The Corporations Act 2001 (Cth) imposes duties on officers and employees. Officer includes, as well as directors and secretaries, some other people who manage the corporation or its property (such as the CEO). Employees includes the CEO but not non-executive directors.

ss180-183 impose duties of care and diligence, good faith, use of position and use of information, the breach of which are civil offences. s184 defines when the breach of these duties rises to the level of a criminal offence. In particular:

Good faith--directors and other officers

(1) A director or other officer of a corporation commits an offence if they:

(a) are reckless; or

(b) are dishonest;

and fail to exercise their powers and discharge their duties:

(c) in good faith in the best interests of the corporation; or

(d) for a proper purpose.

You start with "If a CEO was largely or completely unaware of the situation" which begs the question why was the CEO unaware?

The duty under s180 is pretty clear:

(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Prima facie a CEO has a duty to be aware of what the company is doing and to have introduced appropriate policies, procedures, practices and auditing to detect any criminal activities of the company in a timely manner.

Obviously, they can't be aware of everything the company is doing (unless they are the only employee of the company) but their duty, along with the other officers, is to ensure "with the degree of care and diligence that a reasonable person would exercise" that the company doesn't break the law and, if it does, to detect and deal with that.

In the case of Enron, where the officers knew the company was breaking the law and actively participated in that then they were acting dishonestly and their actions would have been criminal under s184 alongside any other crimes they personally committed.

In the same vein, a CEO who took no action at all to address risks of criminal activity, such as a financial company with no auditing, could be verging on reckless and thus cross over into criminality.

Work Health and Safety Law

although WHS law is largely consistent across Australian jurisdictions.

s19 or the Work Health and Safety Act 2011 (NSW) imposes a non-transferable primary duty (other sections impose specific duties subordinate to the primary duty) on "Persons Controlling a Business or Undertaking" (PCBU) which includes the CEO:

(1) A person conducting a business or undertaking must ensure, so far as is reasonably practicable, the health and safety of--

(a) workers engaged, or caused to be engaged by the person, and

(b) workers whose activities in carrying out work are influenced or directed by the person,

while the workers are at work in the business or undertaking.

(2) A person conducting a business or undertaking must ensure, so far as is reasonably practicable, that the health and safety of other persons is not put at risk from work carried out as part of the conduct of the business or undertaking.

There are 3 categories of criminal offence for breaching that (or any other) duty.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.