Are Corporate Fines High Enough to Make a Difference?

The last three months have seen several large corporate fines levied in response to various high-profile financial scandals, but an article in The Economist asks if fines are still not high enough to actually deter crime:

The economics of crime prevention starts with a depressing assumption: executives simply weigh up all their options, including the illegal ones. Given a risk-free opportunity to mis-sell a product, or form a cartel, they will grab it. Most businesspeople are not this calculating, of course, but the assumption of harsh rationality is a useful way to work out how to deter rule-breakers.

Extremely high and extremely low fines both carry costs, so The Economist suggests a middle ground: fines that offset the benefits of the crime itself. By that measure, even the large fines recently levied just aren’t high enough to change behavior:

Recent big penalties (see right-hand chart) have been far lower than a crime calculus of this sort would suggest is needed, even allowing for the fact that some firms, like Barclays, get discounts for co-operating with the authorities. Britain looks particularly lenient. Its antitrust laws impose fines of up to 10% of revenues; American regulators levy penalties of up to 40%, and the European Commission goes up to 30%.

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  1. Joby Elliott says:

    Sure, maybe our penalties are theoretically higher in the US. Just looking at theoretical penalty caps is missing an important component, though: the likelihood that those penalties will ever actually be enforced.

    In the US the likelihood is much lower than in Europe that regulators will actually do anything about antitrust violations.

    It’s kind of like our top tier tax rates. In theory they’re comparable to other developed nations, but in practice our web of deductions and loopholes mean rich people don’t actually pay that much. In fact they rarely pay anywhere near the on-the-books official tax rate.

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  2. antitrust geek says:

    There seems to be a mistake in the article: the Commission cannot impose fines of more than 10% of the aggregate turnover of the group to which the infringer belongs (see Article 23(2) of Regulation No 1/2003).

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  3. Matthew says:

    Corporate fines have nothing to do with this. As has been stated multiple times, a corporation is not a person but a collection of people. A PERSON makes decisions, and that individual should be held responsible for their decision. A corporation’s penalty should be the profits earned due to the wrong decision. If a company knows that 100% of its profits attributable to an illegal action will be forfeit, and the managers know that their bonuses paid because of those profits will be clawed back, even if it means personal bankruptcy, we can be certain that managers will act with legality and ethics forefront in any decision they make.

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    • Pshrnk says:

      Hidden due to low comment rating. Click here to see.

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      • Tom Swirly says:

        It doesn’t. Neither does the original article. You must be deeply confused…

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    • Tom Swirly says:

      I don’t think the two ideas are incompatible.

      The individual who make the decisions should face criminal charges and when convicted, spend a long time in jail – AND the company itself should be fined some multiple of the profits that they made.

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      • Roy says:

        Spot on…. Fines of the profits, or a mere percentage is no fine at all really.

        If only it could happen though. All you’ll ever hear is “harrumph” from law makers.

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  4. frankenduf says:

    would like to see research comparing effectiveness of monetary fines vs. a bucket of tar and some feathers

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  5. Nosybear says:

    The notion of fining a corporation must be based in the idea that it somehow is an entity capable of making a decision to commit malfeasance. This is not so: The people who comprise the corporation make those decisions. If you fine a corporation, it will simply attempt to pass the fine along to its customers in the form of pricing. If the fine is large enough to damage the corporation, it goes out of business or someone buys it. There is still no punishment because the corporation is not an entity capable of being punished. Instead, go after the decision makers who allowed or fostered the fraud. You can’t jail a corporation but you can a CEO. A corporation has no lifestyle but you can certainly ruin that of the “rogue trader.” Ultimately people and only people are responsible for the actions of a corporation. They’re the ones to be punished.

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    • Ken Arromdee says:

      If the corporation thought that an increase in price would get more money from its customers, it wouldn’t wait until it needed the money to pay a fine; it would do so immediately. So the corporation would already have reached optimum pricing levels (at least as far as it could figure out). Further increases in price at this point would reduce its revenues. If the corporation then gets fined, it has no further room to increase its prices and gain more money to pay the fine.

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  6. Enter your name... says:

    What is “revenue” here? Is that X percentage of gross revenue, net revenue, or profits?

    Imagine I sell a product that costs me $9 to make and sell. If I behave legally, I sell it for $10. If I commit a crime that distorts the market, I sell it for $11. So is the fine up to 40% of the $10 or $11 that I sell it for, or the $2 I actually earned net?

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  7. Joe Dokes says:

    Any headline that has a yes or no question can almost always be answered: NO.

    Are computer games corrupting the youth of America? No

    Is internet pornography destroying large numbers of marriages? No

    Are gun control laws effective? No

    Are corporate fines high enough? No.

    Regards,

    Joe Dokes

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  8. William Nuesslein says:

    The setting of LIBOR has an aspect of chicken entrails to it. Hindsight data clearly showed that Barclay’s estimates to the LIBOR average were biased high. That the bank tried to get in the middle of the pack seems reasonable to me and not a crime.

    Remember how foolish Congress was with respect to the Toyota sudden acceleration matter. Often Americans are just blithering idiots. Please don’t feed the beast.

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