In one of many memorable scenes from Casablanca, the affable but corrupt French police chief, Renault, 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’, followed by the somewhat enigmatic ‘I have to tell you that I am sickened that these events are alleged to have happened, not just because I was editor of the News of the World at the time’.  Ms Brooks announced the closure of the newspaper two days later.

This visceral revulsion  to reports of wrongdoing was also experienced by Bob Diamond,  former chief executive of Barclays. Mr Diamond explained to the Parliamentary Committee on Banking Standards that he was ‘physically sick’ when he learned that 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’.

       In practice, 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 that she had knowledge of the events which so shocked and appalled her prior to their public revelation.

Where does the buck stop? When employees behave badly, how should responsibility be assigned between the individual wrong doer, the organisation in which he or she works, and the people in charge of that organisation? Mr Diamond’s testimony helped persuade the Parliamentary Commission of the central importance of that issue and to recommend steps to emphasise personal managerial responsibility.

        Jed Rakoff, for many years Federal judge for the Southern District of New York, which covers Wall Street, has more experience here  than most In a recent article in the New York Review of Books, he is highly critical of the SEC’s policy of resolving allegations of illegal or improper behaviour by negotiating fines with corporations

Rakoff writes that ‘just going after the company is also both technically and morally suspect’.   He argues that it is wrong to punish the shareholders of corporation – JP Morgan has paid an estimated $25bn 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.’

But which individuals? The ridiculous ‘fabulous Fab’ Tourre became fall guy for the  panoply of abuses which surrounded the securitisation of subprime mortgages. Among Lehman’s Dick Fuld, AIG’s Joe Cassano, and Countrywide’s Angelo Mozillo –  perhaps the individuals most culpable in the global financial crisis –  only Mozillo has suffered any penalty and all remain rich and free.  Regulatory agencies have followed the largely ineffectual route of imposing agreed penalties on corporations because they believe it is too hard to secure convictions against either individuals or firms. This can change only with strict liability – individuals are responsible for what happens under their supervision.  Period.   

Strict liability implies that it is sufficient to demonstrate that a disgraceful event occurred.  It is not necessary to enquire into motive, attribute blame, or ascertain exactly what individuals 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.  

It may seem harsh, and it is not desirable, that the chief executive of a bank should go to jail because a cashier puts his hand in the till.  Strict liability should apply to the actions of subordinates acting in furtherance of  their duties.  That principle differentiates the thieving bank clerk from the trader who sells a customer a product he expects to fail.  When falsification of rate submissions, or misselling of PPI, is common practice rather than the result of the actions of one rogue individual,  the culpability of those in charge should be automatic.  The appropriate principle should be ‘if you take the bonus , you take the rap.’