If you take the bonus, you should take the rap

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In a memorable scene from the film Casablanca, Louis Renault, the affable but corrupt French police chief, closes Rick’s club. “I am shocked, shocked to discover that gambling is going on here,” he declaims, collecting his winnings from the croupier as he orders the customers to leave.

Rebekah Brooks’ memo to the staff of the News of the World echoed these words, no doubt unconsciously. “We were all appalled and shocked when we heard about these allegations yesterday,” she wrote, followed by the somewhat enigmatic: “I have to tell you that I am sickened that these events are alleged to have happened,” she added. “Not just because I was editor of the News of the World at the time.” The British tabloid newspaper closed within the week.

This visceral revulsion to reports of wrongdoing was also experienced by Bob Diamond, former chief executive of Barclays. Mr Diamond explained to the UK’s parliamentary commission on banking standards that he felt “physically ill” when he learnt employees of the bank had been making false rate submissions in the Libor scandal. Mr Diamond explained in his memo to staff that he was “disappointed because many of these behaviours [sic] happened on my watch” but reassured them that “it is my responsibility to make sure that it cannot happen again”.

It proved to be the responsibility of others; a few days later, regulators forced Mr Diamond’s resignation. Ms Brooks also left her post at News International; she was acquitted of criminal charges related to phone hacking because there was no evidence she knew of the events that so shocked and appalled her until they were publicly revealed.

Where does the buck stop? When employees behave badly, how should responsibility be assigned between the individual wrongdoer, his or her employer and the people in charge? Mr Diamond’s testimony helped persuade the commission to recommend steps to emphasise personal managerial responsibility.

Strict liability makes it sufficient to demonstrate that a disgraceful event occurred. You do not need to attribute blame

Jed Rakoff, for many years federal judge for the Southern District of New York, which covers Wall Street, has more experience here than most. He is highly critical of the Securities and Exchange Commission’s policy of resolving allegations of illegal or improper behaviour by negotiating fines with corporations. He has written that “just going after the company is also both technically and morally suspect”. He argues that it is wrong to punish the shareholders of a corporation – JPMorgan has paid more than $20bn in penalties – without pursuing individuals. “The deterrent effect of successfully prosecuting individuals far outweighs the prophylactic benefit of imposing internal compliance measures that are often little more than window dressing,” he adds.

But which individuals? Fabrice Tourre of Goldman Sachs became the fall guy for the panoply of abuses surrounding the securitisation of subprime mortgages. Between Dick Fuld, Lehman Brothers chief executive, Joe Cassano of AIG and Angelo Mozilo of Countrywide – perhaps the most culpable figures in the global financial crisis – only Mr Mozilo has suffered any penalty, and all remain rich and free. Regulators have followed the ineffectual route of imposing agreed penalties on corporations because they believe it is too hard to secure convictions against either individuals or companies. This can change only with “strict liability” – individuals are responsible for what happens under their supervision, full stop.

Strict liability makes it sufficient to demonstrate that a disgraceful event occurred. It is not necessary to inquire into motive, attribute blame or ascertain exactly what the people concerned knew. Strict liability ends the “shocked and appalled” defence, in which the person in charge expresses ignorance and horror at the actions of subordinates.

The chief executive of a bank should not go to jail because a cashier puts his hand in the till. Strict liability should apply to only the behaviour of subordinates acting with the authority of the institution. That differentiates the thieving bank clerk from the trader who sells a customer a product she expects to fail. When falsification of reports, or mis-selling of payment protection insurance, is common practice rather than the avocation of one rogue individual, the culpability of those in charge should be automatic. The principle should be “if you take the bonus, you take the rap”.

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