Crime Pays

[Christopher Valen]

If you asked Americans about the societal costs of crime, most would immediately think of street crimes like burglary and robbery. The FBI estimates that those two crimes alone cost the country $3.8 billion a year. And while the costs are substantial, they absolutely pale in comparison to the costs inflicted on society due to corporate crimes.

Health Care fraud costs taxpayers $100 billion to $400 billion a year. Auto repair fraud costs $40 billion a year, securities fraud, $15 billion a year. Estimates are that the current meltdown in the financial markets will cost taxpayers $700 billion.

The Sarbanes-Oxley Act of 2002 was passed as a result of concerns regarding fraud and corporate corruption. Extensive provisions dealing with internal controls and corporate accounting procedures were written into the law. In addition, the law adopted new crimes and pushed the United States Sentencing Commission to enhance the Federal Sentencing Guidelines provisions for fraud and related offenses.

But the Justice Department, with the blessing of the current administration, has been using a tool called deferred prosecutions to undermine the law. Deferred prosecutions are analogous to pleas bargain arguments for street criminals. Under these agreements, when corporations or its executives are charged with a crime, the government collects fines and appoints an outside monitor to impose internal reforms without going through a trial or convictions. In many cases, the details of the agreement are kept secret. After two or three years, depending on the term of the agreement, the charges are dropped.

Some legal experts now wonder if this policy shift has led to the sub-prime mortgage debacle and the financial crisis we’re facing today on Wall Street. The FBI is now investigating Lehman Brothers, Fannie Mae, Freddie Mac, AIG and two-dozen other firms for evidence of fraud.

So what should we do?

One option is to pass a law that holds supervisors and company executives primarily responsible if they ignore crimes committed by employees or if they knowingly participate in corporate operations that result in a crime being committed.

Whether crimes are committed on Main Street or on Wall Street, the taxpayer foots the bill. It’s high time that the criminals who work those streets pay as well.

[Christopher Valen]

Dana,
I think your ideas regarding confiscatory penalties and prison terms are spot on. It will be interesting to see if the FBI finds anyone guilty of fraud in the latest debacle and if any of the CEOs actually end up doing time. Even if they do, it probably will be in a minimum security prison where they won't be sharing a cell.

[Dana King]

No question. Someone is laundering the money, and someone is buying the stuff, and someone is looking the other way when more aggressive enforcement would catch a lot of people who have enough pull not to get caught. The world we live in has become no more fragrant since Chandler wrote his famous "mean streets" comment.

[John McFetridge]

Yeah. For the drug-dealing street gangs, though, you may want to look at one of Christopher's earlier posts. It's actually similar to white collar crime in that there's a lot of complicity - there are few gang members but lots and lots of drug consumers - even in the suburbs.

You know, most gangs make their money from marijuana. Why is it even illegal?

[Dana King]

A good and timely post. Street crime--using your definition--costs each American between $12 and $13 a year. (3.8 billion / 300 million). I'd gladly pay that if it meant I wouldn't have to worry about being robbed.

I think there are two real problems that hamper proactive white collar investigations. The more serious is, of course, money. The folks that have it ensure the politicians who depend on it don't make this type of enforcement a priority.

Another is how white collar crime can be intrinsically woven into the legitimate practices of the business. Drug gangs are selling drugs, which is illegal. Period. Go get 'em. Now look at Enron. What they did so closely resembled legitimate business activity--until it fell apart--that no law enforcement agency would have invested resources in an investigation, or they'd have to do it to everyone. This is why I think confiscatory penalties and prison terms that rival those given to street criminals are the best solution. White collar criminals do not want to be poor, and they do not want to go from being Master of the Universe to Big Bubba's Bitch. If they know these are possibilities, they may do a better job of self-policing.

We might also want to think of rewarding whistle blowers with a percentage of the recovered funds if their information leads to a conviction. That might clean up a lot of people's acts.

[Christopher Valen]

Thanks, John.
Unfortunately, the possibility of a complete financial meltdown seems more likely every day.

[John McFetridge]

And, if you're going to pass a law you have to make sure there are enough resources to actually enforce it.

It's funny, no one complains when there are street cops everywhere or when there are active drug investigations, but for white collar crime it's expected the police will wait around until someone calls them.

Good post.