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Why The U.S. Isn’t Prosecuting White Collar Criminals

thinkprogress.org | August 5, 2015

By Alan Pyke

A British banker is headed to prison for over a dozen years for cheating the markets, but American prosecutions of financial and other professionalized crimes are at their lowest levels in 20 years, according to data compiled by Syracuse University’s Transaction Records Access Clearinghouse (TRAC).

The decline in American vigor against crooks who keep their hands clean comes as Britain prepares to send a financier to prison for his role in a megabank conspiracy to rig interest rates in their favor. Tom Hayes, 35, was sentenced Monday to 14 years behind bars by a British jury.

Prosecutors called the former UBS and Citigroup trader the “ringmaster” of the small group of bankers who carefully tweaked a key rate called LIBOR over a period of years. LIBOR rigging affected hundreds of trillions of dollars’ worth of financial products across a wide range of industries, potentially harming an almost endless list of individual borrowers and taxpayer-funded governments.

Upon his release, the conviction will ensure Hayes cannot attain the kind of high-powered finance job that might afford him the chance to re-offend. The stiff sentence should also dissuade others in his industry from being cavalier about the law.

Such deterrence is a key tenet of any law enforcement effort. In the United States, a wave of potentially criminal financial activity before, during, and after the 2008 Wall Street crisis has failed to produce any kind of proportional prosecutorial response. The U.S. government is on track to prosecute 36.8 percent fewer white collar crimes this fiscal year than it did in 1995 according to the TRAC data.

William Black, a white collar criminologist and finance professor who helped expose the vast fraud underlying the Savings & Loan (S&L) crisis of the 1980s and then authored a book titled “The Best Way To Rob A Bank Is To Own One,” said the prosecutorial neglect going on today makes future abuses more likely.

“This means that deterrence has been eliminated and the fraud epidemics that drive our future financial crises will be led by the same elite bankers who will already have fraud schemes down pat,” Black said in an email. “Both results are in sharp contrast to the S&L debacle, with more than 1,000 felony convictions in cases…that were hyper-prioritized against the most elite and destructive defendants.”

The government’s response to the fraudulent deals that triggered the S&L crisis was far more robust from the jump, as the New York Times has detailed. There were multiple task forces set up within the first two years after the crisis broke that specifically investigated criminal behavior related to the S&L meltdown. By contrast, federal officials took over a year after the housing market collapsed to even propose a task force – and the idea was shot down by Justice Department decisionmakers. It would eventually reverse course and create the task force 3 years after the crisis, but that team was notoriously underfunded and overhyped.

The more than one-third drop in white collar casework documented in TRAC’s data is in keeping with a longstanding trend. Annual white collar crime prosecutions have been falling gradually ever since the mid-90s, apart from a brief, slight resurgence in the three years immediately following the housing market’s collapse. Even during that post-crisis bounce in activity, white collar prosecutions made up a far smaller share of overall federal cases than they did from 1995-97.

The finding “does not necessarily indicate there has been a decline in white collar crime. Rather, it may reflect shifting enforcement policies by each of the administrations and the various agencies,” TRAC’s report says. The Obama administration has attracted significant negative press for its enforcement policies toward financial crime, which have relied primarily on seemingly large civil settlements with banks that eventually reveal themselves as weak tea once the details come to light.

The administration has even acted to lighten the burden of the few stringent deals it’s won. Just one Wall Street executive went to prison after the crisis, and he wasn’t from one of the mortgage securities firms or loan originators or credit ratings agencies that are primarily responsible for crashing the economy and destroying the lives of millions of homeowners. People much closer to the crisis’ epicenter like former Lehman Brothers head Dick Fuld walked away with their fortunes intact.

The Justice Department points to raw numbers — over 4,000 individuals charged with mortgage fraud and 46,000 total white-collar cases filed since 2009 — but “almost all of these are low-level employees with little or no name recognition,” Times columnist James B. Stewart wrote in February. Failing to prioritize the heavy hitters has exacerbated the harm of the government’s lax response to the crisis, according to Black.

“We are violating the central rule that governed our response to the S&L debacle,” he said. “Never chase mice while lions roam the campsite.”


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