Corporate Fraud Demands Criminal Time
Amen, I say. Robert Tillman and Henry Pontell write in the NY Times:
We’re now getting an idea of just how expensive breaking the law can be. Ten years after Volkswagen executives first decided to cheat emissions tests on some of their diesel models, the company has agreed to pay almost $15 billion to settle claims in the United States.
Volkswagen still faces state and federal criminal investigations in the United States and more around the world; sales of VW cars have collapsed, and the company’s once-sterling reputation has been forever tarnished.
So given the result, why did company executives decide to cheat and what can that tell use about preventing corporate crime in the future?
These are not academic questions. The absence of reliable data makes it difficult to pin down the precise impact of corporate fraud. One recent analysis estimated the annual costs in the United States of just one kind of white-collar crime — corporate securities fraud — at $380 billion.
Fortunately, research on street crime gives us some ideas about corporate crime. There are two fundamental dimensions of deterrence: the certainty of punishment and the severity of punishment. Basically, will I be caught, and if so, how badly will I be punished?
Research on street criminals shows that the first dimension — certainty of apprehension — has a stronger deterrent effect. The more people think they will be arrested for a crime, the less likely they are to commit it.
VW’s decision to cheat was based in part on the assumption that the likelihood of getting caught was very low. Certainly, the company had little reason to fear discovery in the United States, where government regulators have been slow to react to suspected design defects, going back to the infamous exploding Ford Pintos of the 1970s.
And it was relatively easy to fool the Environmental Protection Agency emissions tests, which take place in a lab. The company’s deception was discovered only by chance when a nonprofit organization called the International Council on Clean Transportation gave a grant to researchers from West Virginia University to test emissions when the cars were on the road.
The second dimension of deterrence is severity of punishment. Here again, Volkswagen believed it had little to fear. As late as 2015, after United States authorities had begun to investigate, the company “was advised,” it explained to shareholders, that the record fine for emissions tampering was only $100 million.
But the likelihood of a long sentence or big fine is far less of a deterrent than the likelihood of being caught in the first place. On Wall Street, federal prosecutors have recently relied heavily on deferred prosecution agreements with financial firms like HSBC and Barclays. The companies agreed to stop their illegal conduct for a certain time, after which no criminal charges would be filed.
The deterrent value of these types of punishments, however, is highly questionable. A 2011 analysis by The New York Times found that many Wall Street firms charged with securities fraud in a 15-year period were “repeat offenders” that continued to break the rules even though they faced heavier penalties.
If we are serious about preventing corporate crime, we must change the corporate calculus. First, we need to increase the chances that white-collar criminals will be punished. One approach is an “enforcement pyramid” in which corporate infractions are met with graduated responses that start with education and end, if necessary, with prosecution.
Second, corporate executives must face the very real prospect of doing time in prison and not just pay fines. Judges have handed out very long sentences in well-publicized cases — Bernie Madoff and Jeff Skilling of Enron, for example. But these few severe penalties are not nearly as effective a deterrent as imposing relatively short prison sentences on a much larger number of white-collar defendants.
Third, . . .