“It ain't no sin if you crack a few laws now and then, just so long as you don't break any."

— Mae West in the film Every Day's a Holiday

“Laws were made to be broken.”

— Christopher North, 18th Century Scottish writer

Businesses that elect to follow the above advice may find federal agents visiting the corporate doors in the future. During an economic slowdown, legal problems are the last thing that a business wants to contend with. Company executives and managers know when an economic downturn is taking place. Credit is tight. Business is slow. Customers start coming late in paying bills. Suppliers become reluctant to provide favorable credit terms. Sales decline. Employees need to be laid off. And businesses sometimes cut corners.

This article contains practical legal advice for businesses to follow during an economic downturn. Aside from perhaps going to the dentist, listening to lawyers give legal advice ranks low on the priority list for a business executive or manager. Notwithstanding that point, keep in mind the following tips so that an economic downturn does not exacerbate a company's situation into a legal catastrophe. Otherwise, cutting corners may trigger a visit from the federal government.

•    Don't be tempted to take money out of the corporate 401K account to pay bills.

During an economic downturn, a business' cash flow gets tight. Bills still need to be paid. Some companies may consider dipping into the pension plan fund to informally “borrow” some funds to pay the bills. The bookkeeper thinks it might be okay so long as the money gets repaid promptly, right? The manager who is the fiduciary of the account approves the action, saying, “Just make sure the money is repaid as soon as possible.” No problem, right? Wrong. Under Title 18, United States Code, Section 664, the employee and the manager who authorized or ratified the conduct has just committed a criminal offense. It is a federal offense and a felony because the pension fund undoubtedly qualifies as a plan under ERISA.

Telling the U.S. Department of Labor criminal investigators that you “borrowed from Peter to pay Paul” will not make the criminal allegations go away. In fact, if criminal charges are filed and the matter goes to trial, the judge will instruct the jury that it is “no defense” to the charge to take money out of the pension plan to keep the business afloat. From a trial attorney's perspective, it is most difficult to defend a client in court when the person wearing a black robe makes such a statement to the jury.

•    Don't hire employees who are not lawfully in the United States.

Costs have to be cut during an economic downturn. Employee wages can have a big impact. Human resources managers that don't require new employees to provide valid identification and a Social Security number can find themselves as well as the company in quite a bit of trouble. Immigration and Customs Enforcement (formerly known as INS) agents may come knocking at the company's doors. These agents have badges and guns. Executives and the company may be charged criminally. This type of exposure tends to find its way to the media and customers decide to find a new company with which to do business.

Under Title 8, United States Code, Sections 1324 and 1324a, it is a felony offense to knowingly hire illegal aliens for employment. Employers need to have an employment verification system in place to ensure that employees are not unauthorized aliens. Documents to establish employment authorization and identity must be relied upon, such as a U.S. passport, resident alien card, or alien registration card. Documents evidencing employment authorization such as a Social Security number card and driver's license are needed. The newspapers have profiled several businesses that were temporarily shut down while dozens or hundreds of employees were detained and deported. To make matters worse, the federal prosecutors seek criminal charges against the company and corporate officials who knew of, approved, or ratified the hiring of these employees with inadequate verification of documents.

•    Don't lie to the IRS.

Death and taxes are the two certain aspects of life. Even though a corporation may exist in perpetuity, the taxes need to be paid each year. Business executives want to decide on characterizing a bad deal as an operating loss instead of a capital loss. Questionable deductions can trigger an IRS audit. New legislation has made CPAs particularly cautious due to tax-preparer liability for questionable deductions. Even worse, a grand jury subpoena might arrive at the company's door.

The line between tax avoidance and tax evasion is not always clear. Federal prosecutors and the IRS-Criminal Investigation Division (CID) agents are aggressive in pursuing individuals and businesses that avoid paying income taxes by “investing” in questionable financial structures off-shore such as “business-risk policies.” Yes, these agents have badges and guns too. Companies need to be aware that avoiding payment of taxes on such an investment or policy payment may trigger an IRS audit or grand jury subpoena for records. Having an “opinion letter” from an attorney or CPA who is based in South America or some non-extradition country is cold comfort for the business executive or company that tells the IRS or Assistant United States Attorney that “we thought this deduction was legitimate.”

As the adage goes, if the deal sounds too good to be true, well, it probably is.

•    Don't lie on bank loan applications.

No-document loan applications are going the way of the dinosaur. Known in the business as “liars loans,” this type of lending practice has led to significant problems in the lending industry. Moreover, the person signing the loan application may want to pay attention to the language by the signature block where he or she swears the information contained in the application is true. Under Title 18, United States Code, Section 1001, it is a felony offense to lie to the government. Moreover, under Section 1344, bank fraud is also a felony. FBI agents have been pursuing mortgage fraud investigations with zeal in recent months. The dire financial problems of Fannie Mae and Freddie Mac can be attributed to loose lending practices.

•    When in doubt, call your attorney before making the questionable decision.

Clients enter into business transactions and sign contracts without having attorneys review the documents. The company and business executives need to understand the legal significance of words like “covenant not to compete” and “trade secrets.” How are the words defined in the contract? Broadly? Narrowly? Which law applies if there is a dispute at a later time?

The words “injunctive relief” and “irreparable harm” in a contract can be wonderful words to hear if you are the plaintiff. The same words are dismal sounding if you are the defendant and accused of breaching a covenant not to compete. If the business stipulates in the contract that a violation (or even an attempted violation) of the covenant not to compete provides the other side with the remedy of injunctive relief, then the court may shut down the violator. Yes, that means money damages are insufficient. You can't simply write a check to the other side and have the case go away. Instead, the court will order the business to “close your doors!”

•    Conclusion

Theodore Roosevelt once said, “No man is above the law and no man is below it; nor do we ask any man's permission when we ask him to obey it.”

Obeying the law is not always easy especially when the law is not understood. Everyone, in business knows that legal fees and litigation costs are expensive. However, consulting with legal counsel prior to signing a contract or making a questionable business decision in one of the above categories is prudent and well-spent money. A federal investigation can be expensive and devastating to the reputation and future of a business. On top of that, people may go to prison.

Consulting with legal counsel after the fact is almost guaranteed to cost the company more money. During an economic downturn, it is imperative for businesses to follow the law in areas where it can be easy to step over the line.

Craig S. Denney is counsel for Downey Brand LLP in Reno, Nevada. He defends individual and corporate clients in state and federal investigations in Nevada and California. Prior to joining the firm, he served as a federal prosecutor in Nevada.