Elite lawbreaking is out of control. This is the grotesque story of an existential threat to American society.
In January 2019, white-collar prosecutions fell to their lowest level since researchers started tracking them in 1998.
With few exceptions, the only rich people America prosecutes anymore are those who victimize their fellow elites. Pharma frat boy Martin Shkreli, to pick just one example, wasn’t prosecuted for hiking the price of a drug used to treat HIV from $13.50 to $750 per pill. He went to prison for scamming investors in a hedge fund scheme years before. Meanwhile, in 2016, the CEO whose company experienced the deadliest mining disaster since 1970 served less than one year in prison and paid a fine of 1.4 percent of his salary and stock bonuses the previous year. Why? Because overseeing a company that ignores warnings and causes the deaths of workers, even 29 of them, is a misdemeanor.
Tax evasion, to pick just one crime concentrated among the wealthy, already siphons up to 10,000 times more money out of the U.S. economy every year than bank robberies. In 2017, researchers estimated that fraud by America’s largest corporations cost Americans up to $360 billion annually between 1996 and 2004.
The Offshore Alert conference takes place in Miami each spring, in London each fall and in “key offshore jurisdictions” all year round. Officially, participants come to discuss “wealth creation, preservation and recovery.” Less officially, the tax lawyers come to learn what the feds will crack down on next year. The government investigators come to fish for future jobs. Imagine a yearly picnic where sheriffs give drug dealers tips on hiding baggies from pat-downs and leave with a new set of endorsements on LinkedIn.
The tactics for hiding money from tax authorities are not particularly sophisticated and have barely changed in the last 50 years. Set up a shell company and buy an appreciating asset — Iowa farmland, a London apartment, a New York pizzeria, something common enough that it won’t attract attention.
Most of the time it is simply the blunt application of resources to a series of unimaginably tedious tasks. “Investigators can already crack almost any offshore account if they have enough time and money,” he said. “The problem is that they only get that for a few cases a year.”
More than a third of the FBI investigators who patrol Wall Street were reassigned between 2001 and 2008. Enforcement funding at the IRS has fallen by 23 percent over the last decade. And, worst of all, every time a scandal exposes the government’s inadequacy, Congress steps in to squeeze the regulators even harder.
the CSPC had fewer than 100 inspectors to monitor all imports to the United States. The Los Angeles-area ports where a chunk of the tainted toys arrived was overseen by a single part-time inspector.
Congress responded to the scandal by compounding the mistakes that had caused it. Lawmakers agreed to double the CPSC’s [Consumer Product Safety Commission] budget and increase its staff, but also obligated the agency to carry out dozens of new activities, including the creation of a public database to track safety hazards for every single product sold in the U.S.
The new mandate swallowed up all the agency’s new funding and more. Soon, the CPSC was dedicating nearly all of its time to lead abatement in children’s toys, neglecting millions of products that posed far greater risks to children, like flammable blankets or dangerous table saws.
Mattel, meanwhile, faced no consequences for manufacturing the lead-tainted toys beyond a $2.3 million fine — roughly 0.006 percent of its net income.
Rich people generate mountains of financial data. Millionaires can have over 100 bank accounts; billionaires’ tax returns run to 800 pages long. For people who earn most of their income from working (i.e. almost everyone), the IRS has an automatic system that compares individuals’ reports to the records submitted by their employers and banks. For the wealthy, who make much of their income from interest and investments, the agency has nothing to compare their reports against. The only way to tell if a rich person is cheating on their taxes is to sit down and go through them line by line.
White-collar cases involve understanding arcane laws, absorbing thousands of pages of documents, traversing international jurisdictions and coordinating a vast array of agencies from the Secret Service to the Post Office.
Even though auditing millionaires and billionaires is one of the most cost-effective government activities imaginable — an independent report estimated in 2014 that it yielded up to $4,545 in recovered revenue per hour of staff time — the IRS investigated the returns of just 3 percent of American millionaires in 2017.
Another bargain-hunting strategy is to try cases in administrative proceedings rather than civil courts, an innovation that reduces hearings from months to hours. The downside, though, is that these cases largely play out in secret, resulting in fines rather than prison time and don’t compel defendants to testify, turn over evidence or admit guilt.
In a case-by-case analysis of the 216 alleged large-scale corporate frauds discovered between 1996 and 2004, researchers found that the media uncovered twice as many as the SEC.
SEC reported a steady rise in prosecutions between 2002 and 2014, most of the increase was statistical padding. … “they’re engaging in their own version of accounting fraud.”
As soon as the nation turned its attention elsewhere, Skilling’s lawyers began quietly dismantling his sentence [former CEO of Enron]. They filed appeals objecting to the statutes used to convict him … the Department of Justice agreed to cut ten years off Skilling’s sentence if he promised not to file any more appeals. He was released in February 2019 after serving less than half his original sentence.
Andrew Fastow, the mastermind of Enron’s network of shell companies, now makes his living lecturing business school students and fraud investigators about how he did it.
Honest services fraud, for example, is the subsection of mail and wire fraud that prohibits companies from lying to customers to get their business and CEOs from lying to investors after they’ve already been hired. Think of a mechanic telling you that your perfectly functional transmission is busted, then telling you it will cost $2,000 to fix it. He hasn’t defrauded you exactly — he really will replace your transmission — but he used his position of authority to scam you into paying for something you didn’t need.
Since 1909, prosecutors have used the honest services fraud provision to go after companies that lie to boost their stock price and politicians who give golfing buddies lucrative procurement contracts.
But over the last three decades, the Supreme Court has taken the law apart piece by piece. … From now on, the lying mechanic is breaking the law only if someone else is paying him to scam you.
In 2006, a district court judge reaffirmed the right of companies to pay the legal fees of their executives, effectively giving every C-suite defendant the same deep pockets as their corporate employer.
The confounding thing about these challenges is that they often highlight real weaknesses in the criminal justice system. American law is a contradictory jungle of century-old statutes and arbitrary definitions. Lying to government investigators, for example, is prohibited by at least 215 separate laws, each with their own standard of proof. Mens rea, the concept of “guilty mind” central to establishing criminal liability, has more than 100 definitions across various statutes.
According to a study by the Federal Judicial Center, four out of five judges in federal courts (where the vast majority of white-collar cases are decided) are white. A 2010 survey found that they have an average age of nearly 70. Their base salary is $210,000 per year.
researchers found that “high-status” white collar criminals, such as doctors scamming Medicaid, were 98.7 percent less likely to receive prison terms than welfare fraudsters.
… A 2015 study found that judges showed increasing mercy as fraud offenders moved up the income scale: Criminals who stole more than $400 million got sentences that were less than half of the minimum recommended by federal guidelines.
“Put people on a jury and they’ll say, ‘Gee, it seems like this guy was doing his job, so I don’t think it was a crime.’”
The jury declared Stoker not guilty. But in the same envelope as their decision, they included a handwritten note. “This verdict,” it read, “should not deter the S.E.C. from continuing to investigate the financial industry.” In other words: Keep trying to lock up greedy bankers. Just not this one.
This insight also explains why the legal system applies the opposite logic to organizations run by the rich and organizations run by the poor. Teenage gang members who argue that they committed crimes due to the culture of the Crips or the Latin Kings receive harsher sentences — stealing money for yourself is bad; stealing money for a criminal organization is worse. Corporate defendants who claim they committed crimes due to the internal culture of Goldman Sachs or HSBC, on the other hand, get lighter sentences — how could an individual possibly be held accountable for something everyone else was doing?
And so, as they lose the ability to prosecute high-level crimes and elite offenders, many of America’s criminal justice institutions have simply stopped trying.
Nearly all criminological research indicates that crime rates depend more on environments and incentives than the intrinsic morality of offenders. It’s why shootings spike on hot days and drivers speed up on wider streets. People aren’t good or bad; they drift into good or bad behavior when one or the other is rewarded.
You can see where I’m going with this. Since the 1980s, Wall Street, Congress and the courts have systematically encouraged American elites to commit more and larger graft.
So how do we stop this? The obvious temptation is to bring back the glory days of white-collar prosecutions, to lengthen the sentences for CEO dirtbags and finally arrest the bankers that got us into the financial crisis.
criminologists have consistently found that increasing the likelihood of punishment works better than increasing its severity.
“The way you get deterrence is by showing them they’re being watched.”
The only thing that consistently worked was to combine them — warnings from government agencies, surveillance of the worst actors, harsher punishments for repeat offenders and, yes, at the top of the ladder, criminal prosecutions for corporations that refused to shape up.
When it comes to street gangs and drug distribution networks, the criminal justice system has no problem simplifying complex criminal liability questions into four simple words: You should have known.
