Granted, most people aren’t particularly sympathetic to the problem of fabulously profitable multinational institutions being prosecuted. If anything, many demand to know why financial institutions haven’t been brought to their knees following the revelations of the housing meltdown, when it became obvious they were selling repackaged underwater mortgages as prime investments. Where were the corporate heads that were supposed to roll?
At PrawfsBlawg, an explanation is offered:
To paraphrase, the problem is that many regulated firms are effectively judgment proof. We may threaten sanctions against accounting firms that commit fraud, or chemical firms that dump waste into the river, or banks that swindle their counter-parties. The problem is that the typical criminal sanction is too big, since indictment triggers a run on the firm by its employees, trading partners, and (eventually) creditors. Prosecutors have therefore basically stopped indicting, leading to the rise of deferred-prosecution agreements.
Brings a tear to your eye, right? This variation on too big to fail, too big to prosecute, reveals a political decision made in the basement of Main Justice that they don’t want another Arthur Andersen, an indictment of a huge firm that leads to its swift demise, the loss of thousand of jobs, huge disruption and loss of confidence in the stability of institutions. If Arthur Andersen can collapse from an indictment, any big business could.
Much as the government might want to punish the corporation, the fallout did more harm than the punishment did good. This is the “over-deterrence” problem, where every prosecution ends in the “death penalty.”
It’s like the problem of medieval justice: if the sentence for every crime is hanging, bandits have no marginal incentive to avoid killing their victims.
Rather than indict, DoJ chose to use deferred prosecution agreements. For a price, a deal was struck that would avoid indictment, effectively fine the corporation, and allow everyone to get back to business. But that wasn’t quite enough:
[T]he deferred prosecution agreement is too wimpy. Since firms know that the government won’t indict, they have no reason to cave, leading to quite defendant-friendly deals. This leads to under-deterrence.
Cue Goldilocks. Or in this case, Elizabeth Warren, channeled through Matty Yglesias at Vox.
Warren says these deals “were originally created to deal with low-level, nonviolent individual offenders” but have now “transformed beyond recognition to create get-out-of-jail-free cards for the biggest corporations in the world.”
She proposes a number of efforts to increase enforcement, including critical remarks in the direction of the Securities and Exchange Commission, but the biggest idea here is a “two strikes and you’re out” policy for the Justice Department.
“No firm should be allowed to enter into a deferred prosecution or nonprosecution agreement if it is already operating under such an agreement — period,” she says.
Two strikes, because three strikes worked so well.
Should big banks really get a free pass? It’s true that the stakes are higher in shutting one down, but the stakes are higher in their misconduct, as well.
“It’s time to stop recidivism in financial crimes and to end the ‘slap on the wrist’ culture that exists at the Justice Department and the SEC,” Warren says.
Of course, Warren’s “tough on corporations” approach has the virtue of not requiring congressional approval, thus avoiding its inability to accomplish much of anything. On the other hand, it would bring back the Arthur Andersen problem. But on the third hand, Warren properly notes that deferred prosecution agreements just don’t have the heft to bring corporations to their knees to beg for forgiveness.
There is always the side deal of tossing a few executives under the bus to make a show for public consumption of how tough the DoJ can be and how much corporations want to save Piping Plovers as they rob you blind. This, of course, is just ritualistic sacrifice, of utterly no lasting consequence, and performed to sate the appetite of the groundlings. Executives are replaceable. The corporation must live on.
Do you get the sense that there’s something missing here, that no one has strayed much from the bottom line assumption that the government can micromanage corporations the way they do individuals, and twist the criminal justice system into knots trying to make it work?
There is, of course, an entirely different approach to the problem that isn’t on the table: Decide what corporate crimes deserve the death penalty, and prosecute them. If a corporation goes all Arthur Andersen on society, then so be it. The crime was that bad that the corporation deserved to go under.
But if the offense isn’t worthy of the havoc prosecution wreaks on a corporation, than get it out of the criminal justice system altogether. The regulatory control over corporations, because everyone knows that assistant United States attorneys know far better how to run business than businesses do, dictates how many sheets of toilet paper an executive vice president is allowed to use per flush.
The question isn’t whether huge corporations engage in some monumentally harmful fraud and abuse, but that criminal sanctions exist for the trivial, and even the dubiously non-criminal choices that only smell bad because someone in Congress met a cute lobbyist for the competition, as well as the serious.
Between Congress and executive agencies, there are few aspects of corporate governance that aren’t subject to absurd regulation. Ironically, little of it has done much good in making corporations better citizens, but that’s largely because these rules defy the reality of business. Don’t forget that if a business doesn’t make a profit, it disappears.
So decide what’s worth causing the collapse of a big business, regardless of what industry it’s in, and if the corporation has engaged in such bad conduct, take the sucker down. Otherwise, keep the DoJ out of it, and stop threatening the death penalty every time a corporation burps.
And before anyone reminds me how evil corporations can be, I’m well aware that they suck. But without them, millions of people would be unemployed, the goods we buy regularly would be far more expensive, research and development would be limited to things we can build in a garage and there would be no one to build the infrastructure that allows them to sell us overpriced and underperforming goods and services. So I hate them as much as anyone, but I also realize that we would still be farming the back 40 without them.