Prosecuting white-collar crime in the US

February 2020 | FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2020 Issue

White-collar crime in its many forms is becoming more sophisticated. The proliferation of technology, for example, has emboldened criminals, allowing them to develop new, harmful techniques which carry a high financial risk for targets. According to the Federal Bureau of Investigation (FBI), white-collar crime is estimated to cost the US more than $300bn annually.

It has also attracted considerable public and media attention in recent years, such as the high-profile prosecutions of Michael Cohen and Paul Manafort, among others. Yet despite these cases and the increasing cost to the US economy, the number of white-collar criminal prosecutions in the US has been falling since the final years of the Obama administration. Under president Trump, despite federal prosecution levels remaining historically high, 2019 saw the lowest number of white-collar prosecutions in 33 years, according to the Department of Justice (DOJ). Statistics released in September 2019, show that white-collar prosecutions were down 8.5 percent from the same period in 2018, to 4973, half what they were nine years ago, according to the Transactional Records Access Clearinghouse, a research centre at Syracuse University that tracks federal data. In the 1980s and 1990s, the number of white-collar prosecutions regularly neared 10,000 a year, yet in the past three years it has not topped 6000.

There have also been suggestions that sentencing for white-collar crimes in the US has been disproportionally lenient compared with non-financial crimes. For example, Mr Manafort was sentenced to 47 months relating to fraud charges which cost the Internal Revenue Service (IRS) millions.

Equally, in United States v. Sample, the judge, when sentencing former investment adviser Matthew Sample on charges that he defrauded investors of over $1m, recommended that instead of serving a five year custodial sentence, as had been suggested, he should instead keep his job in order to pay back his victims. This decision was overturned in the 10th Circuit of the US Court of Appeals, however, which said it was “puzzled by the court’s implicit suggestion that if the defendant were poor and unemployed, he might get a prison term”. The appeals court found that relying on a defendant’s wealth as a basis for reducing a sentence was improper.

“In the 1980s and 1990s, the number of white-collar prosecutions regularly neared 10,000 a year, yet in the past three years it has not topped 6000.”

Other, more structural problems may exist in the US’ approach to white-collar criminality. Former FBI director James Comey highlighted that prosecutors of white-collar crimes are required to demonstrate that the person they are charging knew what they were doing was wrong at the time, which may help explain the lack of criminal prosecutions in the aftermath of the financial crisis.

Changing enforcement priorities within the Trump administration have also had an impact, with greater emphasis placed on immigration and other issues. The administration also appears reluctant to have multiple federal agencies involved in prosecuting the same corporate criminal cases.

Despite the overall drop in numbers, the DOJ is taking some action. In October 2019, it announced two significant developments. First, it released new guidance on how prosecutors should evaluate requests by corporate defendants for a reduction in fines and penalties based on a stated inability to pay. Second, it announced the restructuring of its Securities and Financial Fraud Unit as the Market Integrity and Major Frauds Unit.

The DOJ is also establishing five teams of prosecutors that will specialise in different aspects of white-collar crime: securities fraud, commodities fraud, government procurement fraud, fraud on financial institutions and consumer fraud, regulatory deceit and investor schemes. It is hoped the increased specialisation will result in more enforcement cases in the coming years. The DOJ has stated that white-collar prosecutions remain ‘a top priority’. It also intends to help companies stop wrongdoing at source and will incentivise them to maintain compliance with the Foreign Corrupt Practices Act (FCPA) and other regulations in order to reduce misconduct.

There are further steps companies, individuals, regulators and the judiciary can take to ensure the successful prosecution of white-collar crime in the US.

Whistleblowers should be encouraged to come forward, as they are a vital source of information in the fight against financial crime. Financial incentives have proven popular in the US where there are four main whistleblower reward programmes provided by the US Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the IRS and the False Claims Act (which contains provisions allowing whistleblowers, or qui tam ‘relators’, to bring suits on behalf of the US against wrongdoers who are defrauding the government). The financial incentives from these four programmes are significant, with record awards to date ranging from $45m to $250m.

The level of punishment meted out for white-collar malfeasance remains a thorny issue. As we head toward the 2020 US election, it remains to be seen whether white-collar prosecutions emerge as an area of focus, particularly as several Democratic primary contenders, including senator Elizabeth Warren, have expressed their intention to increase the criminal liability of executives in the banking sector, if elected.

Richard Summerfield