35 Pages Posted: 17 Apr 2007 Last revised: 3 Apr 2014
Although the common law's embrace of a mens rea requirement in the criminal law reflected an advanceon both moral and efficiency groundsover ancient law, recent legal developments suggest an unfortunate return to what are, in effect, strict liability crimes. Some modern criminal laws have explicitly abandoned any mens rea requirement, creating de jure strict liability; more commonly and insidiously, criminal laws applicable to many regulated industries are so ambiguously drafted, and entail such severe penalties, that the effect of the law is what we call de facto strict liability. In this article, we argue that these two trends-soaring penalties for corporate crimes and dilution of a mens rea requirement – could have the paradoxical consequence of creating more corporate crime and not, as the standard story goes, less.
We conceive of the competition for corporate control as waged by three human "types" ideal entrepreneurs (who are risk-neutral with respect to business decisions, but risk-averse with respect to compliance with the criminal law), swashbucklers (who are risk-neutral with respect to both business decisions and criminal law compliance) and bean counters (who are risk-averse on both of these margins). From society's perspective, the optimal environment is one that allows the ideal entrepreneur to thrive. Unlike bean counters, she is willing to take entrepreneurial risks that benefit society. Unlike swashbucklers, she is hard-wired to comply with the criminal law even at substantial cost. But as the criminal law becomes increasingly draconian, and its application unpredictable that is, as it becomes one of de facto strict liability our model demonstrates that she will flee for other environments. As every increase in criminal penalties more thoroughly drives away the ideal entrepreneurs, adverse selection operates, and swashbucklers more completely dominate the field. The ultimate irony is that the indeterminate widening of the scope of white-collar criminal law, and the penalties that attach for its violation, may drive away the very people most susceptible to being deterred by the criminal law.
Keywords: Sarbanes-Oxley, law and economics, criminal law, mens rea, risk
JEL Classification: K14, K42, L26
Suggested Citation: Suggested Citation
Lerner, Craig S. and Yahya, Moin A., 'Left Behind' after Sarbanes-Oxley. American Criminal Law Review, Vol. 44, No. 4, pp.1383-1416, 2007; George Mason Law & Economics Research Paper No. 07-18. Available at SSRN: https://ssrn.com/abstract=981064