Business Partners: Are You Responsible For Their Ethics?

business

Friction between business partners is common without a clear delineation of duties. Partners frequently have different ideas as to how to run the business and invest capital. Unfortunately, some businessmen seek to enrich their companies by committing fraud and tax violations. Whether an unwitting business partner is liable for that malfeasance depends upon the circumstances surrounding the people involved, the act, and even the company itself.

Privately-Held Companies and the Mens Rea

A wide array of federal crimes, including tax evasion and false claims made under the False Claims Act, require a certain level of intent to commit the act or knowledge that they were committing the act. Mens rea means “guilty mind” in Latin and is used to denote intent leading to culpability. Strict liability offenses do not require a mens rea, as intent is not required.

This means that individuals are generally not personally liable for the actions of their business partners, as the intent to commit the offense lies with the partner. Such actions can harm the company by resulting in regulatory backlash such as hefty fines. Since many business owners have not only an income interest but have also personally invested in the business, this can be painful to the partner. However, direct regulatory action against the innocent victim is unlikely.

Public Companies and the Sarbanes-Oxley Act

The matter becomes considerably more complicated if the company is public. Congress passed the Sarbanes-Oxley Act of 2002 after a series of accounting scandals around the turn of the century, most notoriously involving Enron and WorldCom. Sarbanes-Oxley imposed significant requirements upon publicly traded companies, most of which were aimed at ensuring the integrity of the company’s financial reports.

Among other requirements was the mandate for certain executives to certify the company’s periodic financial reports. The executives must certify that the statement contains no misstatements or omissions of any material facts pertaining to the company and its subsidiaries and fairly represents the financial condition of the company and its condition. Executives must also certify that the company has internal controls and that these controls have been audited in the last 90 days.

This means that if one company’s principal officers is involved in an ongoing fraud against the company and the other officers know about it, they are personally liable if they sign off on the corporate financial statements. Penalties range from a $1,000,000 fine to 10 years imprisonment or both per violation. This ensures that the controlling officers at a company cannot misrepresent their company’s financial position, including tax liability, without incurring personal liability.

Blowing the Whistle

Blowing the whistle on ongoing fraud is a personal decision with benefits and detriments. From a financial standpoint, whistleblowing activities aimed at a company in which one has a controlling interest are likely to reduce the value of that company as the government not only demands compensation but also high punitive damages. On the other hand, whistleblowers are generally entitled to a sizeable portion of the funds received from government actions. Additionally, from an ethical standpoint, fraud and misrepresentation are morally reprehensible activities that cost the taxpayers money.

Individuals interested in blowing the whistle on unlawful activity should contact an experienced false claims attorney such as Goldberg Kohn,Ltd. The whistleblowing process usually starts with a qui tam action served upon the Attorney General of the United States. The government will have the opportunity to pursue the claim itself or reject the claim, in which case the plaintiff may pursue it privately. In either case, the plaintiff is entitled to a percentage of the recovery.

No matter the source, federal investigations targeted at a company in which you own a sizeable stake are not fun. A prolonged investigation will take time and if the fraud is big enough, the ensuing regulatory action, lawsuits, and negative publicity against the company can destroy it. However, by failing to take action, executives who mistakenly went into business with a criminal condone such conduct. When a source of liability is discovered, the correct course of action is to stop all illegal activity and seek legal counsel immediately. Anyone who fails to do so may find that a lawsuit for a breach of a fiduciary duty is the least of his or her problems.

A former news journalist, Ann Bailey reports on this issue of ethics and consequences for anyone suspecting their partner of underhandedness. Goldberg Kohn,Ltd is an aggressive legal voice of protection for any client choosing to become a whistleblower to seek right from wrong in their business arena.

Photo Credit: http://www.flickr.com/photos/dellphotos/8430831912/

 

Small Businesses with Government Contracts: Why Play by the Rules?

Alcatraz

Running a small business can be rewarding, especially if you’re able to land lucrative government contracts. Many government contracts allow small businesses to not only expand and grow, but also to gain a name for themselves within the business community. Unfortunately, some small businesses jeopardize these benefits when they don’t play by the rules, and the consequences for such actions can be dire.

Breaking the Rules and the Law

Many small business owners understand the unspoken rules regarding ethics in business and morality when doing business with a government agency, but too few understand that breaking these unspoken rules can actually lead to criminal and civil prosecution. Under the False Claims Act, business owners who have contractual business obligations to the government may face a variety of penalties upon being caught breaking the rules, and this can land such business owners in court and behind bars.

What is the False Claims Act?

The False Claims Act is a law that essentially allows individuals to prosecute contractors in court if the contractors are found to be defrauding the government. Referred to as “whistleblowers,” they generally stand to earn a handsome reward for their efforts in the form of monetary gain if a False Claims Act case is successful. Basically, a whistleblower acting on behalf of the government will be due a portion of the award handed down by a judge once a such a case succeeds, and this amount can reach into the millions of dollars or more depending upon the severity of the infractions and the contract’s terms.

Can Business Owners Benefit?

Aside from the potentially negative consequences of the False Claims Act for small business owners, there actually is a bright side. If you are able to prove that your competition is defrauding the government, you can contact a False Claims Act attorney and take it upon yourself to bring the fraud to light. By doing this, you’re not only helping the government and tax payers save money, but you’re also doing the right thing – of course, potentially putting your competition out of business and receiving a financial reward doesn’t hurt either.

Be in the Know

If you’re unsure as to whether or not your business is acting within compliance of your government contract, you might want to consider partnering with a False Claims Act attorney to discuss the issue. They will be able to review your contract and your practices, allowing you to find potential trouble spots that need to be addressed or corrected. Doing this will also help you to remain protected in the event that someone does blow the whistle on your business as a Whistleblower’s attorney will be able to represent and protect your interests in court.

Finally, as a small business owner who has a contract with the government, it’s up to you to ensure that all of your employees understand the severity of breaking the rules and the law. Even if an employee goes off on his or her own and commits fraud, you and your company may still get the blame. As a result, most experts recommend regular training sessions for all employees regarding the correct ways to conduct contractual business with the government.

Ann Bailey has formerly reported on business fraud for TV news and shares this report for employers who might be in contract positions. The attorneys at Goldberg Kohn aggressively represent clients involved in court-suits due to the False Claims Act or any business to government fraud situation.

Photo Credit:  http://www.flickr.com/photos/caitlinator/3044373233/