California AB 2432 imposes increased penalties for corporate crimes

California Governor Gavin Newsom recently signed House Bill 2432 (AB 2432) into law, meaning that, effective January 1, 2025, companies convicted of crimes in the state will face severe new fines. This law, aimed at curbing corporate misconduct, imposes increased fines on companies convicted of felonies or misdemeanors and mandates that a portion of the fines collected be used to support the California Crime Victims Fund.

Because these new regulations apply to corporations, partnerships, trusts, LLCs and public entities, all businesses operating in the state should consider the increased legal and financial risks associated with a criminal conviction in a state.

AB 2432 created a new provision, Section 1398 of the California Penal Code, allowing courts to impose additional fines of up to $25 million or (if the offense resulted in the loss of a victim’s money, labor, or property) twice that value impose the loss. The amount of the additional fine is at the discretion of the courts and the courts are instructed to take into account the seriousness of the offense, the duration of the conduct and the assets of the company when determining the actual amount.

Separately, AB 2432 also amends California Penal Code § 1202.4(r) by imposing “restitution penalties” of up to $100,000 for felonies and $1,000 for misdemeanors, unless there is a “compelling and exceptional reason “, not to impose these.

While this enhancement is likely most commonly used in large white collar fraud cases, California state prosecutors may seek the enhancement in a variety of corporate crime contexts, including environmental violations and consumer fraud crimes.

The financial impact of the law goes beyond the additional penalties themselves. In some cases, AB 2432 fines increase existing penalties, resulting in a significant increase in overall liability. For example, a company convicted of consumer fraud could see its penalty skyrocket due to the additional assessments and improvements.

The legislative intent here is clear: California wants to prevent corporate misconduct and hold companies accountable for their misconduct.

Another driving force behind AB 2432 was the need to provide a stable source of funding for California’s Crime Victims Fund. That fund, which supports programs that support victims of human trafficking, domestic violence and child abuse, has faced budget challenges due to declining federal contributions. The bill aims to solve this problem by channeling revenue from financial crime penalties directly into these services.

Takeaways

Although policymakers and politicians disagree about whether AB 2432 will have the desired impact, companies operating in California should not wait for this debate to unfold before taking appropriate steps, including reviewing and strengthening their compliance programs. Companies should consider identifying the greatest risks to their organizations posed by California state law and taking proactive steps to ensure that their operations and practices comply with these legal standards.

Such a response not only reduces the risk of a breach in the first place, but can also help the company if an undetected breach comes to light later. By establishing a culture of compliance before a violation is discovered, a company can make a compelling case to the prosecutor and the court about whether AB 2432’s severe new penalties are justified.