Restoring criminal liability for financial fraud

The credit crunch of 2008 as we all know was mainly caused by bankers who finagled several transactions within the mortgage industry or the market of mortgage securisations. The  U.S. government have pressed charge only to the minority of the people responsible for the greatest economic crisis, the worse of the past few decades.

The question that has raised after so is whether there is still justice in America and if the current administration has the right competencies to deal with these sort of criminals.

An important point of view on this matter was recently brought by Catharyn Baird, CEO of EthicsGame with the paper “Restoring Criminal Liability for Financial Fraud in the United States: A Moral and Legal Imperative”.

“Too big to fail”doesn’t seem to perfectly match the essence of the story.  Someone has described this era as  “too crooked to fail,” which seems more appropiate in this case.  Even more appropriate seems to be the slogan  “too in bed with government to fail.” – which provides an explanation for the impotence of the watchdogs.

The above mentioned paper reports:   “Some high-level criminal prosecutions for fraud are essential to restore balance in the financial system, a balance that would come from a healthy fear of individual indictment rather than fines paid by the firm [i.e., shareholders].”

Baird, Mayer, and Cava posit nine possible reasons for this state of affairs:

• “Some deception is accepted as part of marketplace behavior.  Caveat emptor is still a practical ‘default’ position.…the duty to favor the firm becomes almost automatic.”
• “Juries are mystified by the complexities of financial transactions.”
• The hurdle of the reasonable doubt standard is too high as “jurors are generally likely to find ‘reasonable doubt’” which masquerades for their ignorance.
• “Financial wrong-doing at the highest levels often has the protection of corporate attorneys representing the alleged wrong-doers.”  Ironically, these fees are paid by the shareholders who have been injured by the fraud.
• “The FBI’s resources are limited, and the Department of Justice can only prosecute the files that the FBI prepares; in addition, agents are promoted within the ranks based on successful convictions…”  The number of employees at the FBI and the SEC is simply too small to confront these demons.
• “There is the appearance that major civil lawsuits and government-sponsored settlements create sufficient accountability, but individuals are not held accountable as criminal laws would, and the firms themselves often pay just a portion of the monies they ‘earned’ as a result of deceptive practices.”
• “Neither political party has the nerve to alienate the major banks as potential funders of their political campaigns.”
• “Financial fraud detection requires a whole different type of training.  Creating these types of specialized agents takes significant time and money.”
• “It is possible that new criminal statutes need to be crafted that will meet the due process and vagueness concerns of” recent court cases.

Indeed, the inability to address adequately the accounting and corporate scandals during the last several decades indicates something is wrong in our cultural fabric.  We do think Baird, Mayer, and Cava are correct when they state “the crisis is not just financial, but legal and ethical as well.”

This blog article want to be a wake-up call for the current economic system.  As trust is a requirement for economic actors to transact business deals, and since regulators and courts seem unwilling or unable to supply justice to capital providers, the capital markets will be in danger unless some fundamental changes are made.