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November 4, 2016

"The lock-’em-up mentality for white-collar crime is misguided"

The title of this post is the subheadline of this recent Economist piece, which reviews a couple notable new books about white-collar crimes and punishments. Here are excerpts:

One thing right-wing populists and left-wing progressives can agree on is that society is too soft on white-collar crime. Conservatives abandon their admiration for business when it comes to “crooked bankers”.  Left-wingers forget their qualms if locking up “corporate evil-doers”.  Hillary Clinton’s line that “there should be no bank too big to fail but no individual too big to jail” would go down equally well at a Donald Trump rally.

But is society really soft on corporate wrongdoing? And would locking up bankers and businessmen and throwing away the key really solve any problems?  Two new books try to inject reason and evidence into a discussion more commonly driven by emotion and hearsay: “Why They Do It: Inside the Mind of the White Collar Criminal” by Eugene Soltes, of Harvard Business School, and “Capital Offenses: Business Crime and Punishment in America’s Corporate Age” by Samuel Buell, the lead prosecutor in the Enron case, who now teaches at Duke University.

Messrs Soltes and Buell both demonstrate that America is getting tougher on business crime. Between 2002 and 2007 federal prosecutors convicted more than 200 chief executives, 50 chief financial officers and 120 vice-presidents. Those at the heart of two big corporate scandals in 2001 and 2002 received harsh treatment: Bernard Ebbers, WorldCom’s chief executive was sentenced to more than 20 years without the possibility of parole — the equivalent of a sentence for murder in many states — and Kenneth Lay, Enron’s former boss, died awaiting sentence.  Between 1996 and 2011 the mean fraud sentence in federal courts nearly doubled, from just over a year to almost two years, as the average sentence for all federal crimes dropped from 50 months to 43.

America is constantly giving way to the temptation to punish white-collar criminals more severely: the Sarbanes-Oxley act (2002) and the Dodd-Frank bill (2010) both include measures designed to punish corporate types more severely. Other countries are moving in the same direction.... The global war on white-collar crime is giving rise to a new global industry: advisers such as Wall Street Prison Consultants and Executive Prison Consultants specialise in helping white-collar criminals adjust to life behind bars.

Prosecutorial zeal does not always result in convictions, but that is because prosecutors face some difficult trade-offs — including respecting the rights of some of the world’s most unpopular people.... The DoJ could bring far more individual prosecutions. But most corporate crime is the result of collective action rather than individual wrongdoing — long chains of command that send (often half-understood) instructions, or corporate cultures that encourage individuals to take risky actions. The authorities have rightly adjusted to this reality by increasingly prosecuting companies rather than going after individual miscreants.

Prosecuting firms may not have the smack of justice that populists crave: you can’t imprison a company, let alone force it to do a humiliating “perp walk” — being paraded in handcuffs in public. And the people who end up paying the fines are shareholders rather than the executives or employees who actually engaged in the misconduct. But it saves the taxpayer a great deal of money: the DoJ routinely asks firms to investigate themselves on pain of more serious punishment if they fail to do so.  It also advances the cause of reform, if not retribution: companies are routinely required to fix their cultures and adjust their incentive systems.

Populists like to think that there is a bright line between right and wrong: overstep it and you should go directly to jail.  But a great deal of wealth-creation takes place in the grey area between what is legal and questionable.  Some of the world’s greatest business people have overstepped the mark. Bill Gates was hauled up before the authorities at Harvard University when he was a student for using computers without permission. Steve Jobs participated in backdating stock option-based compensation at Apple, including his own, in order to inflate the options’ value....

The strongest populist argument is about double standards: it is wrong to let the rich get away with a slap on the wrist while poor youths are put in prison for possessing an ounce of cocaine. Messrs Soltes and Buell have clearly demonstrated that the rich aren’t getting away with a slap.  But even if they were, this would argue for reforming criminal law for the poor rather than extending the lock-’em-up mentality to the rich.  Society should by all means punish white-collar criminals if they have obviously committed crimes and imposed harm.  But it should resist the temptation to criminalise new businesses testing the rules.  And it should certainly resist the temptation to single people out for harsh punishment simply because they are rich and successful.

A few recent related posts:

November 4, 2016 at 09:15 AM | Permalink

Comments

What has happened over the past 20 years at least is a de-regulation and de-supervision of the financial services industries, basically fewer and fewer cops on the beat. So if we don't hammer one of the multitude of fraudsters who by co-incidence happen to get caught, how do we prevent their crimes and the damage they cause to the broader society? I have no problem with lower sentences, provided we have a robust regulation and supervision system in place.

Posted by: Fred | Nov 4, 2016 11:16:01 AM

"But even if they were, this would argue for reforming criminal law for the poor rather than extending the lock-’em-up mentality to the rich."

I'm game for this sort of principle but the "lock-em-up" mentality in practice honestly wouldn't quite be comparable in practice. And, the "culture" and other points on why punishments are being applied today on corporations very well might be true. The same things very well can be applied to non-white collar crime too probably. And, the people involved have as a whole less resources to secure their rights and well-being in the process.

Posted by: Joe | Nov 4, 2016 11:49:47 AM

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