Follow the Money: Why Financial Crimes Often Go Unpunished

Seven Reasons Financial Crimes Often Go Unpunished

Case Complexity

Crimes committed in the financial world often require an intricate understanding of financial markets. Simply put, one must understand the game’s mechanics and rules before understanding how they can be broken.

But the nuances of international financial markets aren’t easy to explain to a jury. As such, prosecutors increasingly seek to skip a trial altogether, and simply negotiate a plea bargain that involves fines and perfunctory promises to correct corporate behavior, but little in the way of meaningful punishment to either the company or its executives.

Limited Liability

The modern corporation is designed to limit individual liability, which naturally limits the ability to effectively prosecute those at fault. And while corporations have many of the same rights as people, they can’t be physically jailed. So prosecutors often seek fines—fines which aren’t paid by the perpetrators, but by the company, and therefore ultimately by the stockholders.

Collateral Consequences

Collateral consequences, such as in the cases of Arthur Anderson and Enron, can mean tens of thousands of innocent employees lose their jobs due to vigorous prosecution. Furthermore, decades of deregulation have left the economy heavily intertwined, where aggressively punishing large banks can hurt the wider economy.

To avoid these collateral consequences, the US government has undergone a period of deferred-protection agreements, whereby an offending company would simply acknowledge what it did was wrong, pay a fine, and promise to improve its behavior. From 2002 to 2016, the government arranged more than 400 such agreements. There’s little to show that these deter further misbehavior.

Questionable Intent

Samuel W. Buell, a law professor at Duke University who served as lead prosecutor in the Enron case, notes in his book, Capital Offenses, that the standard defense in a fraud case isn’t that fraud didn’t happen; it’s that the perpetrator didn’t know they were breaking the law.

Intent is remarkably difficult to prove in these instances. What if their accountants, lawyers, or superiors told them it was okay? What if this crime was considered an innovative business practice spread out across multiple employees? A leader may need more insight into the day-to-day operations of a company, while a rank-and-file worker may claim (s)he was only doing his job. The difference between corporate crime and shrewd business practice can sometimes come down to subtleties and context.

Prosecutorial Pragmatism

According to Buell, the government tends to only pursue prosecution in cases it thinks it can win, which explains why some crimes go unpunished. This approach has been somewhat successful: from 1996 to 2011, the average sentence given in cases of fraud nearly doubled, while, over the same period, sentencing dropped for federal crimes overall.

And, unlike street crime, where victims are often singular and vocal, financial crime has less obvious victims—a crime’s impact is often spread out thinly across shareholders, colleagues, and, even more broadly, the entire market.

Warped Incentives

The natural incentive of a corporation is to increase profit. The natural incentive of a worker is to stay on their boss’s good side. Meanwhile, the incentives for corporate whistleblowers are dismally low. Why report a crime that might never be discovered and might not even be a crime in the first place? Why ask if something is a crime when it’s working and you retain your deniability by maintaining ignorance? This structure of misplaced incentives leads to fewer financial crimes being reported, and therefore fewer financial crimes being punished.

Implicit Bias & Privilege

A vast majority of corporate criminals are men from privileged demographics. Their wealth can afford high-powered legal counsel, and their education can see them navigate the legal system more adeptly than the average person.

Furthermore, prosecutors face a dilemma in crimes where the damage is purely financial: will this perpetrator be better able to pay restitution if they are in jail or if they’re working a high-paying job? What best serves justice?

Bias also exists within the context of the commission of the crime itself: a culture of confirming leadership decisions without scrutiny only enables possible instances of fraud. Finally, and perhaps most worryingly, the regulations that define financial crimes are often unfairly influenced by the campaign contributions of the very companies who may be committing them—which is hardly the case for the average person.