This  is part of the Middle Passage Law Series  and is cross posted on Commercial Law International .

American International Group, better know by its acronym AIG, it seems these days can rarely catch a break. It just seems negative news follows negative news for this company. This time the negative news for this too big to fail company – deeply wounded by the global credit crunch and later recession – has two of its units being accused of racial discrimination in their lending practices.

It is important to note that AIG has not been found guilty of anything; in fact it wasn’t even accused of any wrong doing.

WHAT?

I know, I know, it seem like I am saying that AIG is involved yet not involved in this case. And yes that is exactly what I am saying.

All of this may seem totally contradictory but let me assure you it is not. What we have here is a classic illustration of legal reality vs. public perception of a company’s brand. In order to be successful companies have to be mindful of the differences between these two concepts and effectively manage their interrelation.

The Department of Justice (DOJ) allegations were never directed at AIG, the parent company, but were instead directed at two of its subsidiaries –AIG Federal Savings Bank (FSB) and Willmington Finance Incorporated (WFI). Both banks were accused of not sufficiently monitoring the activities of mortgage brokers who sold mortgages that they funded. The brokers were, according to the DOJ, offered African-American borrowers less favorably borrowing terms than similarly financially situated whites. The two have agreed to settle the case with the DOJ and have agreed to pay at least $US6.1 million without admitting liability as part of the terms of settlement.

The case broke no new ground as far as banks in the US being accused of racial against minorities, namely African-American and Latino-Americans, in fact similar settlements or even full blown litigation involving other US banks will surely be making the headlines in the near future. The case however did break new legal ground in that for the first time US authorities held a lender directly responsible for the racial discriminatory acts of brokers. As a consequence, from now on banks will have a positive duty to monitor the activities/policies of brokers that they fund, to the best of their ability, in order to ensure that they are not using race to determine borrowing terms. This duty also of course carries with the co-duty to take positive action whenever a bank believes that a broker is using race.

From a strict legal perspective AIG, the parent, hands remain totally clean is this matter. It is important to reiterate that AIG was never accused of anything; the allegations were solely directed at the two subsidiaries. And no this is not a simple matter of splitting hairs, while related all three companies are separate. The legal concept of the corporate veil – the independent legal identity of companies, even if related – is a fundamental one in corporate law. The corporate veil is best understood as a shield that is used to protect all the right that come with incorporation. This is not to say that it can never be lifted/pierced, for it can, but this is only done in rear and specific instances where for example fraud is alleged or where for some reason the directing/controlling mind of a corporation needs to be identified.

However, these allegations go beyond strictures of the corporate veil and this is where public perception of the brand and effective management of that brand become important. AIG and its army of brand management specialists both know that the general public are often not so discerning as to make the distinction between parent and subsidiary; as far as the public is concerned AIG is AIG. This is the reason I believe that there was such a quick settlement – the last thing AIG, the parent, needs is a protracted legal battle involving accusations of racial discrimination, albeit involving subsidiaries. This would be a public relations nightmare.