23 Nov Fraud laws and ineffective enforcement letting criminal companies off the hook, new IEA research suggests
A successful market economy relies on effective laws that minimise fraud. Fraud incurs high economic costs by eroding public trust and deterring economic activity, distorting competition, misallocating resources and reducing tax revenue. Nonetheless, fraud makes up 41% of all crimes recorded in England and Wales.
In a new IEA discussion paper ‘Fixing Fraud’, Dr Alison Cronin argues that large corporations should not be effectively guaranteed deferred prosecution agreements (DPAs) to address the crimes they commit. Used as an alternative to prosecution they fail to act as a deterrent, and they may serve to actively promote fraud.
DPAs involve companies reaching an agreement with a prosecutor to suspend the prosecution, offering leniency in return for self-disclosure. This allows authorities to access evidence that is otherwise difficult to obtain, and means that companies avoid lengthy and expensive trials, as well as the prospect of actual prosecution and the more extensive reputational damage that comes with it.
They are justified on the basis that they minimise collateral harm to otherwise innocent stakeholders, but this overlooks the greater costs incurred in artificially preserving companies that can only prosper through criminal activity.
By ensuring the continued viability of large corporate offenders, DPAs are not a deterrent but are simply seen as a cost of doing business. Cronin argues that a credible threat of invoking the full force of the criminal law is required to deter corporate criminality. This requires that criminal prosecutions are brought as an example in deserving cases.
While the DPAs exchange of leniency for self-disclosure overcomes the problem of obtaining evidence, information is purchased at the cost of deterrence. The most efficient way to obtain evidence is to buy it from those with easiest access to it and the UK should incentivise corporate whistleblowers. Recent research shows that whistleblower incentivisation schemes in the United States work and that they serve as a potent deterrent.
The cost of incentivising whistleblowers is far outstripped by the benefit of the legal enforcement that it enables. In the US, awards to whistleblowers under the False Claims Act totalling $9 billion related to sanctions imposed of over $75 billion between 1989 and 2023.
Approximately 70% of civil fraud recoveries obtained are the direct result of whistleblower information.
Getting tough on corporate fraud can only boost our economy.
Dr Alison Cronin, Principal Academic in Law at Bournemouth University and author of ‘Fixing Fraud’ said:
“Companies that stay in business because of criminal behaviour are parasitic, they do not increase the economic pie but merely redistribute it in a non-efficient way.”
“In appropriate cases, for example where there is serious, deliberate or repeated misconduct, the stigma of a traditional criminal conviction would serve to elicit an appropriate, and potentially more enduring, market response. In the unlikely event that a corporation should fail as a consequence of conviction, it should be understood in terms of the efficient operation of markets.”
“That the direct and indirect costs of using DPAs are not fully acknowledged as collateral damage, in the same way that the costs associated with corporate prosecution are, is a major oversight that needs urgent address. An informed debate on the unseen social cost of the predominant use of DPAs is much needed.”
“It is only the traditional trial process, with the attendant threat of criminal conviction, that can harness the criminal law’s full deterrent potential and thereby reduce the burgeoning social costs associated with regulatory failure. This is not to suggest that there is no place for DPAs in the fight against corporate crime, simply that they should not play the exclusive role that has come to be expected for corporations considered “too large to fail.”
“While the practice of buying cooperation from parties involved in criminal conduct is relatively uncontroversial, through the mechanisms of plea bargaining and sentencing discounts, the idea of incentivising corporate informants through whistleblower inducements is still met with considerable resistance. Oddly, the reverse prospect elicits no such response and corporations in pursuit of deferred prosecution agreements necessarily inform on suspected employees.”
Simon Fell, former UK Government Anti-Fraud Champion said:
“This is a timely and well-argued paper. Fraud is at epidemic levels and the system wide response must change to counter it. We need better prevention, increased awareness and education, for industry to work across silos to limit the dark deltas in which fraudsters operate, much more data sharing, and for law enforcement and regulators to be better resourced to strike at those responsible.
“We also have to ensure that there is an effective deterrent for corporations to act as good citizens. Dr Cronin’s central argument that DPAs are all too often seen as a cost of doing business is spot on. Improving and enhancing whistleblowing and providing a credible threat of criminal conviction would be a powerful means to achieve this.”
Recent legislation in the Economic Crime and Corporate Transparency Act 2023 made mixed progress to address the problem. The extension of the range of officers whose guilt can be attributed to the corporation for fraud is welcome, though the new ‘failure-to-prevent fraud’ offence is disappointing in its limited application to just large companies. We are unlikely to improve the anti-fraud regime in the UK without significant improvements in enforcement.
