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Uncollected Fines Undermine Regulation

David Callahan

It is no secret that government regulators often mete no more than a slap on the wrist for corporate wrongdoers guilty of serious crimes. As I have written here and elsewhere, federal authorities routinely reach settlements in which corporations do not actually acknowledge doing anything wrong and agree to financial penalties. Typically, no individual executives are named in these settlements or held personally responsible for their actions. 

All this is bad enough and helps explain widespread criminal behavior in corporate America. But now comes worse news from a new study: Many of the fines that the government imposes are never actually paid. According to the article, published in Yale Law & Policy Review by Martin Pritikin and Ezra Ross, the government was owed more than $35 billion in "uncollected criminal debt" in 2006 -- a figure that has soared from $5 billion in 1995. Even as this tally has ballooned, the amount collected annually by the government has stagnated.

State and local governments are also failing to collect huge amounts of money in fines. 

For some agencies, the low collection rates are truly stunning. For instance, the federal Office of Surface Mining had a collection rate of 5 percent for the years analyzed by the authors -- so it's no wonder that mining companies can be so brazen about flouting regulations aimed at protecting workers and the environment.  

The SEC and Office of Commodities Futures Trading Commission had much higher collection rates, but even these two vital watchdogs of our financial system didn't collect over 50 percent of the penalties owed under settlements for the years analyzed. These revelations should give us pause when we see headlines of gigantic settlements with financial firms -- for instance, the $550 million that Goldman Sachs agreed to pay last year in a case related to mortgage-backed securities. 

Another problem with government fines, although the authors don't focus on it here, is that they are often paid out in installments over time. So even when corporations or individuals do pay up, they may be allowed to do so in a way that minimizes the pain and disruption of such penalties -- which undermines their point. 

The authors cite a number of reasons the government fails to collect, including insufficient resources for going after deadbeats and "agency capture" in which regulators are too close to industry to be tough enough with wrongdoers. The solutions to this problem aren't going to come easy and the authors explore several different options, including turning over the debt to private collectors. But all the options have one problem or another. 

If you want to know why corporate America seems to think it can get away with anything these days -- and why, in fact, they often can -- this article is required reading.