Corporate crime: does the deterrence we use really work?

On the 7th June, I had the great pleasure of attending the Corporate Crime and Corporate Social Responsibility conference held at Canterbury Christ Church University. All of the speakers were incredible; however, three presentations struck a chord with me. These were: Master Desiree Artesi (Inner Temple); Dr Alison Lui (Liverpool John Moores University), and; John Christensen (Tax Justice Network). All three talks took very different approaches to a wider and somewhat troubling topic, corporate crime.

These talks have inspired me to research further into this topic and to write this article, where I will attempt to broadly define corporate crime and outline some of the deterrents we currently use to prevent it, examining whether they are really working.

Because corporate crime is such as wide-ranging topic, this article will be focusing on what is commonly called ‘white-collar’ crime. Dr Julian Hermida defines this as “[a] crime committed by the rich and powerful in the course of their occupation. They are illegal acts committed by an individual of high social status during the course of legitimate occupational activity for personal –or organisational- gain or by employees against their employers”. This can take many forms including but not limited to tax evasion, credit card fraud, bankruptcy fraud and price fixing.

There are currently two main deterrence we use in preventing corporate crime. The first is a financial fine and the second is imprisonment for the responsible party (usually board members/directors). I will now look at the effectiveness of each of these in turn.

Financial fines

One constantly hears in the media of large corporations being fined or reaching an agreement on a financial settlement. One of the largest fines a UK regulator has enforced on an organisation was fining Barclays bank $450m for its part in a price-fixing scandal. In the months of July, June and May (2012) firms in Britain and America had agreed to pay out over $10 billion because of wrongdoing. But it isn’t just banks like HSBC and Barclays receiving fines. The pharmaceutical firms GlaxoSmithKline and Abbott Laboratories have been stung for illegal marketing. Out of all these fines, Abbott Laboratories was affected the most, not because it's fine was the largest, but because the percentage of affected profits was impacted the most by 12.3%, with Barclays profits only being affected by 0.5%.

Gary Becker of the University of Chicago has theorised that corporate criminals must way up the pros and cons of committing such corporate crimes such as price-fixing. Taking Beckers idea, one must, therefore, assume that the controlling hands of the company consider the criminal pathways to profit as well as the legal ones. In addition, considering that corporate crime of all forms is still taking place in commercialised society, the benefit of committing a corporate crime far out ways the cost (Source). It’s also interesting to note that the Corporate-Cartel fines imposed by the US Department of Justice since 1980-2011 have fallen from over 100 fines a year to less than 25. However, the sizes of the fines increased considerably in 2000 and 2011; however, they seem to be dropping again (Source).

A view popularised by Aaron, Director of the University of Chicago, has suggested that we impose no fines on corporate wrongdoing, and allow the free hand of the market forces to deal with the companies; the theory being that punishing companies for committing such wrongdoings will lose the trust of investors and customers, and, ultimately, lose business (Source). However, large powerful firms would be likely to still be able to exploit the market to make a profit (especially if they had a monopoly over a certain market). Connor and Gustav Helmers of Purdue University conducted research into 283 international cartels operating between 1980-2005, and they found that, by operating the way they did, the aggregate revenue increase of the cartels was $300 billion (Source).

The complete opposite perspective to that of Aaron is that an increase in the amount of fines would ensure a decrease in the amount of corporate crime. Mr Becker’s crime calculus might lead to the conclusion that fines should be as draconian as possible—seizing all a wrongdoer’s assets, for example. However, this could severely damage market competition leading to other firms gain a monopoly of the market.

The third issue relating to fines was researched and proposed by Messrs Connor and Helmers, which considers calculating the gain the criminals achieved and offset that via fines. For example, the median amount that cartel members overcharged was just over 20% of revenue in affected markets. Using Messrs Connor and Helmers, you would firstly need an assumption about the chances of being found out: a detection rate of one cartel in three would mean trustbusters were doing well (Source) (Source). This would mean a fine of 60% of revenue which is far higher than the 1.4% and 4.9% that was actually fined in the study.

Prison sentences

Stanton Wheeler of Yale School of Law conducted a study and found that Judges in the USA have different aims when they are sentencing white-collar criminals compared to non white-collar criminals. The aims when sentencing non white-collar criminals were found to be punishment, incapacitation, general deterrence, and occasionally rehabilitation. However, when sentencing white-collar criminals, Judges were mainly concerned with deterring other criminals because these criminals have seemingly clean records and are not a physical threat to society (Source). But does this really work?

Wheeler found that most judges share a widespread belief that the suffering experienced by the white-collar person as a result of apprehension, public indictment and conviction, and the collateral disabilities incident to conviction-loss of the job, professional licenses, and status in the community completely satisfies the need to punish.

Susan Deehan, Chair and CEO of Actionable Intelligence Technology (ATI) and a developer and supplier of financial investigation systems, has said that the reason why the conviction rate for white-collar criminals is so low is due to the complexity of the cases making it far harder to achieve the standard of proof needed for a conviction (Source). Furthermore, regarding actual sentencing, Giovanni Mastrobuoni at the University of Essex and David Rivers at the University of Western Ontario have found that harsher sentences (e.g longer sentences) can work as an effective deterrent to white-collar crime but only to a point.

However, it's all well and good increasing the harshness of the sentencing guidelines. Yet if white-collar criminals received a ‘first-class’ or better treatment in prison than other criminals, what's the point in sentencing them? Mickey Sherman, who spent part of 2011 in the Otisville, New York, a camp for tax evasion, said last year that the most dramatic part of prison took place when inmates watched American Idol and argued over who got kicked off (Source). Martha Stewart served in the Alderson, West Virginia, women’s prison, where she taught a yoga class and created an entire nativity scene out of ceramics. Her minimum-security prison—complete with “cottages” and tree-lined gates (Source). A Business Insider article on Bernie Kerik 4 year imprisonment hints that the rich and powerful are treated no longer differently in prison. However, Andrew Snyder (A Therapist Who Preps White-Collar Criminals for Prison Time) has said “If you're a first-time offender convicted of a white-collar crime—let's say you have a 24-month sentence you're likely going to a federal prison camp. That's a big difference, between going to a medium-security or maximum-security prison. The danger is much lower; there's a lot more autonomy. The federal prison camp is—I’m not going to say a cakewalk—but it's much easier than a higher-security institution” (Source). So it's entirely possible that there is still preferential treatment in the prison system.

I fully understand why there is some degree of separation between types of criminals for security reasons. I am also the first person to advocate that our justice system should primarily be focused on rehabilitation. However, is the degree of separation between white-collar criminals and non-white-collar criminals becoming (or remaining) so vast that it prevents a prison sentence operating effectively as a deterrent?

The output of these studies has led me to come to the conclusion that the current system of fines and prison sentences are not working – admittedly, Connor and Helmer’s theory of calculating fines hasn't been tested yet, but I think it could hold great promise. What can be done to deter corporate and white-collar crime? In next months article I will explore some other suggestions on how we can deter corporate crime as well as suggesting some of my own ideas.