Ethics Corner

March 2006

Corporate Liability: Beware of Rogues And Ostriches

By Thomas O. Miller

A corporation can be liable for a criminal or Civil False Claims Act violation stemming from the conduct of “rogue employees,” who are politely known as “adverse agents,” and employees who are willfully blind or deliberately ignorant of ethical, legal and contractual requirements.

More exposure exists in high-risk foreign locations—especially if employees hide their heads in the sand.

Ethics and compliance standards can detect and prevent acts or omissions of corporate employees, agents, subcontractors and affiliates. Documenting use of these standards is invaluable during any enforcement investigation.

Special measures should govern employees—and responsible supervisors—who work in high-risk foreign locations, under accelerated U.S. contract performance requirements. In unfamiliar, remote environments, employees become increasingly autonomous, particularly if data and communications are exchanged without connection to a central data system.

Opportunities to bypass or ignore standards abound, and employees are vulnerable to pressures to deliver at any cost. In such circumstances, wisdom suggests heightened proactive measures to detect and prevent violations of law, standards and contractual requirements.

The legal doctrines of “respondeat superior” and “corporate collective knowledge” often lead to corporate responsibility for the acts and knowledge or deliberate ignorance of its employees acting within the scope of their employment. Under the collective knowledge doctrine, the acts and “knowledge” of the corporation’s employees can be aggregated to impute certain liability where no individual employee’s acts or knowledge is sufficient.

One exception is the “adverse agent doctrine.” First, the presumed identity of interest between the employer and employee is offset when the employee acts outside the scope of his authority. Second, the presumption an employee will perform his responsibilities and communicate information to his employer is offset when the interests of the employee and employer become adverse. An exception to the adverse agent rule returns liability to the corporation if the adverse employee has sole responsibility for the transaction from which the violation arises, without effective supervision.

Together, collective knowledge and deliberate ignorance—by the corporation or an employee, whether a rogue or not—can expand corporate liability. If no single employee’s acts are sufficient, liability instead may be based on aggregated acts of multiple employees.

If sufficient liability is based only upon aggregated acts of multiple employees, imputing the required state of mind to the corporation to establish liability generally is limited to “knowing,” excluding particularized states of mind, such as “intent to defraud” or “corruptly.”

In short, aggregated acts cannot be used to establish a particular state of mind by the corporation. A single employee must have the state of mind.

A corporation can be liable for a violation, without actual knowledge, based upon its own deliberate ignorance, or that of any employee acting within the scope of his employment. Deliberate ignorance at the organizational level, or imputed through employee conduct, means:

• Knowledge of facts supporting a high probability of other facts constituting a violation.

• Intentionally ignoring the high probability of a violation by not inquiring or investigating those facts for the purpose of avoiding the truth and the facts confirming the violation.

Deliberate ignorance by one employee as to the truth or falsity of a material statement supporting a claim to the government for payment can be imputed to the corporation.

Certain steps can enhance existing standards for contract performance in high-risk foreign locations and reduce corporate risk. These suggestions assume an effective ethics and compliance program based on accepted industry models. The goal is proactive adaptation of the existing program to counter deliberate ignorance and the rogue employee.

Education. Indoctrinate employees about doing business in a specific location. State Department country handbooks and other publications are a good start.

Supervision. Maintain clear supervision and reporting procedures, and establish an on-site ethics and compliance “mini-structure,” with a designated ethics officer who reports to, and can get answers from, a senior officer within division or corporate management.

Electronic data and communications controls. Communications transmissions over portable or fixed electronic devices are common overseas, and employees may operate outside of an organization’s central data system. All devices should be synchronized or backed up to the corporation’s central data management system on a required schedule.

Finance and accounting controls. Use of corporate funds and assets to support the contract must be recorded in reasonable detail and audited and monitored more frequently than normal.

Effective data management techniques. Establish efficient electronic approval “gateways” for key decisions of on-site managers, including approval of invoices, payments, expenditures and the like.

Due diligence. Take extra steps to establish ownership qualifications, and reputations of foreign subcontractors and agents. Monitor and report on work quality and deadline compliance.

Red flags. For each contract, create and distribute a list of “red flags” tailored to that contract and environment. Require regular “red flag reports” into the central data system, even when none are encountered, and designate someone to monitor the reports.

Regular risk assessments. Continually review risk factors and update solutions as performance evolves.

Thomas O. Miller is general counsel of L-3 Government Services Group. The opinions expressed here are solely those of the author and are not intended to provide legal advice or represent the view of NDIA or the NDIA Ethics Committee.

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