Natasha Sarin on Corporate Crime and Punishment

Every year, the FBI puts out a report titled Crime in the United States.

The report is about street crime in the United States.

Left out of that annual report – corporate crime.

Dorothy Lund of the USC Gould School of Law and Natasha Sarin of the University of Pennsylvania Carey School of Law raise this issue in a just released paper – The Cost of Doing Business: Corporate Crime and Punishment Post-Crisis.

In the last few decades, the Department of Justice has embraced many law and economics enforcement tenets including entity liability over individual liability, fewer prosecutions and a greater number of settlements, and high fines over jail time, they write. And several papers have documented these enforcement trends in detail.

“However, unlike every other type of crime, the government does not collect data about corporate crime levels. Therefore, we cannot tell how corporations are responding to these enforcement practices.”

But just because the government doesn’t collect data about corporate crime levels doesn’t mean that Sarin and Lund can’t try to determine whether or not enforcement is deterring corporate crime.

To get a handle on the problem of corporate crime deterrence, Lund and Sarin use three novel sources: the Financial Crimes Enforcement Network (FinCEN) Suspicious Activity Reports (SARs), consumer complaints made to the Consumer Financial Protection Bureau (CFPB), and whistleblower complaints made to the Securities and Exchange Commission (SEC).

“Each source reveals a steep increase in complaints or reports indicative of financial institution misconduct,” they write. “We also examine levels of public company recidivism, which are also on the rise. And we document a potential cause: recidivist companies are much larger than non-recidivist companies, but they receive smaller fines than non-recidivist companies – measured as a percentage of assets and revenue. In theory, high fines can supply adequate deterrence by themselves, but our results indicate that it might not be politically feasible to levy a sufficiently high fine to deter future incidents of corporate crime. Put differently, for large companies, criminal penalties may be just another cost of doing business – and quite a reasonable cost at that. We conclude by offering recommendations for enforcement agencies and policymakers. Fines large enough to deter malfeasance are large and potentially infinite—well outside the possibility set for policymakers. The Department of Justice should therefore consider other ways of securing deterrence, such as by increasing penalties against guilty individuals.”

Shouldn’t the FBI put out a Corporate Crime in the United States report?

“It would be pretty straightforward to track corporate crime in the same way we track street crime,” Sarin told Corporate Crime Reporter in an interview last month. “Why don’t we have it? Regulatory capture? Incentive structure? I struggle with the question of why our understanding of corporate crime levels is where it is today. Part of what we advocate for in the paper is for enforcement agencies to be much more vigilant about requiring corporations to regularly report criminal behavior.”

“There is a distinction between street crime enforcement and white collar crime enforcement. There has been a transition away from individual level liability for criminal conduct in corporate crime cases. Why? People say it’s just very hard to bring these cases. And the result is we won’t punish individuals in the white collar crime context. But of course, we punish individuals all the time when it comes to street crime. That creates a two tiered justice system. If you are wealthy and commit one kind of crime, you don’t have to worry about being held individually accountable. But if you are not, you certainly are held accountable. From an equity perspective, it seems undesirable and not likely to achieve the kind of deterrence we want in the corporate crime context.”

You conclude that corporate crime is not being deterred. Why isn’t it being deterred? Just last week, Wells Fargo settled a major corporate crime case for $3 billion. 

“We think it is likely that we are not doing enough to deter corporate crime. But our data is incomplete and we need better data. It’s important to caveat what we say by saying that the data is imperfect. But we are in fact skeptical that we are doing enough to deter corporate crime. And the reason is this – look at Brandon Garrett’s data and look at the fines that are imposed on corporations and the nature of recidivism by those corporations. In the aftermath of the crisis, we have charged much higher fines. But you also see that those fines as a proportion of revenues and assets for large corporations are lower than they are for small corporations. When you have a giant multibillion multinational, the right fine to deter optimally is just outside the possibility set of the enforcement agency.”

The Wells Fargo criminality was egregious. Why wasn’t the Wells Fargo fine higher?

“We almost think that there is some sort of historical dollar benchmarking. There is some sort of threshold after which it becomes too high or too unfair relative to what it has been historically and so the enforcement agencies are not going to even try something larger. In standard law and economics theory, the right fine is the fine that is proportional to the level of social harm that is being committed by the bad actor. That is a hard exercise in the regular street crime case. But in the context of corporate crime, it’s infinitely harder. How do you assign a value to the fake account scandal? How do you assign a value to mortgage fraud that led to the worst recession since the Depression. Even coming up with the right number is difficult.”

What should the fine against Wells Fargo have been? And should executives have been criminally prosecuted?

“The fine should be calculated based on the harm done. I would speculate that the $3 billion is an order of magnitude too low. Does three percent of 2019 revenue sound right? It seems low to me. Would a number that is 30 percent of revenue fine seem high? And would such a fine encourage shareholders to force their institution to rethink how they operate?”

“This was a decades long fraud that was perpetuated and encouraged by Wells Fargo’s top brass. This was a case where there was evidence that the Department of Justice has an actual Wells Fargo executive hiding their sales practices from regulators in order to try and avert suspicion.” 

“Is this the right penalty? On Friday, the CEO of Wells Fargo celebrated this settlement and said –  this chapter of our company is over. We can get on to being the company that is the bank that services millions of American consumers. It can’t possibly be that the level of the fine is right.” 

“The second part of your question is – how do we determine if someone should go to jail? Judge Jed Rakoff makes the point that in the aftermath of the savings and loan crisis, 1,100 people went to jail. In the aftermath of the financial crisis, one mid level executive went to jail.”

“We have clearly moved away from a model where there was a realistic threat of jail time. There are costs associated with putting people in jail. In theory, you can achieve the same deterrent effects by individual level fines. But in reality, we are seeing this move away from individual liability in part because it is difficult to trace out the relationship of the executives and the actual criminal behavior that was committed.” 

“What do you do about that? Senator Elizabeth Warren has proposed lowering the standard for what is required to bring a criminal case against a bank executive. Under her proposal, executives can be criminally charged for creating cultures or for negligently supervising institutions. That’s on the one end of the extreme set of possibilities.” 

“On the other side, there should be much stronger clawback provisions, very aggressive public shaming of corporate bad behavior, executives should immediately lose their jobs as a result of negligently overseeing workplaces that foster criminal behavior. Even if we took jail off the table, you would still get much more deterrence than you do today.” 

You mentioned shaming. Corporate crime shaming was lost when we ditched criminal plea agreements or going to trial. Defense attorneys say that the one thing companies fear most is the stamping of the guilty plea or the finding of guilt. Should we bring that back?

“It shouldn’t be the case that at the same time that the Department of Justice is celebrating a successful end to the Wells Fargo case, the CEO of Wells Fargo is also celebrating that they have weathered the crisis successfully and now they are going back to business as usual.”

“And that wouldn’t be the case if we required that the institutions take responsibility, say you in fact did wrong. In the world that we live in now, the institution doesn’t have to state publicly that individuals in the institutions committed wrongdoing.”

“You don’t get reputational consequences if no guilt is ever ascribed to anyone associated with the criminal behavior. Individual admission of guilt is much more powerful than these deferred and non prosecution agreements where no guilt is ever ascribed to anyone and often to any institution.”

You also point out in your paper that the vast majority of corporate crime prosecutions are against smaller companies. And smaller companies pay higher fines relative to their size. Isn’t this emphasis on prosecuting smaller companies, the move away from guilty pleas to deferred and non prosecution agreements, the move away from prosecuting corporate executives – isn’t all of this the result of corporate power?

“It is the case that in the aftermath of Enron and Arthur Andersen, there emerged two levels of reluctance. One level of reluctance was – gosh, it’s difficult to bring these cases. They require time and enforcement outlays. It’s easier to go the route of alternative settlements. But the other thing is what Eric Holder said – too big to jail for large corporations. We can’t take 100 percent of Wells Fargo’s revenues from 2019. Doing so risks driving these institutions to the financial brink, potentially forcing them into bankruptcy. And that has ramifications for the employees of the institutions and potentially for the broader economy. In the extreme case, it could lead to financial panic and drive us to a crisis. We have to be aware of these broader implications and they should temper our desire and impulse for some sort of justice.”

“That’s why you see larger penalties for smaller firms than for larger firms. In some sense, that is about corporate power. In order to get this privileged status of not being punished too harshly, you have to be a large corporation with a stake in the broader economy.” 

“But it’s kind of perverse. Large corporations understand that no one is going to punish them too harshly for criminal behavior. And what is to discourage them from committing crimes to boost their profits? Nothing. In fact, you create an ecosystem where if you are the firm that doesn’t commit crimes, you are unlikely to be as profitable or as viable as the companies that are committing crimes. Perversely, you incentivize that behavior that leads to the kinds of crisis – like the recession – that you are trying to avoid by not punishing firms aggressively.”

“We have this whole thing a little bit backwards. If anything, we should be more attentive to bad behavior committed by institutions that are systemically important. Ignorance of that behavior encourages it not just at the criminal institution, but at other institutions that are watching. The failure to address this criminal behavior does have real implications to the broader economy.”

[For the complete q/a format Interview with Natasha Sarin, see 34 Corporate Crime Reporter 9(13), March 2, 2020, print edition only.]

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