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Corporate crime — most commonly fraud — costs hundreds of billions of dollars each year. And when a scandal emerges that involves a big player like Enron, Volkswagen, or Wells Fargo, the public demands accountability.  

Americans favor criminal charges and prison time for the individuals involved, and the government is frequently criticized for the declining rate of federal indictments and prosecutions — particularly since the 2007 subprime mortgage crisis that helped fuel a broader economic collapse.

Throwing more bankers in prison may feel satisfying, but the idea that it's an effective deterrent is too simplistic and too optimistic, says Duke Law professor Samuel W. Buell, a lead prosecutor on several cases within the Enron Task Force at the Department of Justice. In fact, bringing individuals to trial requires enormous expenditures of time and money — and is more likely than not to result in acquittals or mild sentences.

“The more fundamental, and difficult, problem with the dominant model of how to attack corporate fraud is that it’s much harder to obtain a conviction than people believe,” said Buell, the author of Capital Offenses: Business Crime and Punishment in America’s Corporate Age.

“That's not to say that the government shouldn't continue to pursue these cases, but just that people shouldn’t have unrealistic expectations about this being a solution to what is a large, complicated problem. The litigation results stand as strong evidence that even the best-looking cases for prosecution can turn out to be expensive failures.”

In a recent paper, Buell analyzed the trial and appellate records of more than 100 criminal actions taken against individuals since 2008 to explain why it’s so difficult to establish individual criminal liability in corporate fraud cases.

Out of 58 actions for financial fraud — involving the sale of mortgage-backed securities and trading of interest rate and currency derivatives — prosecutors obtained and upheld 19 convictions. Only 13 of those sentences included prison time, a 22% success rate. And out of more than a dozen prosecutions in corporate scandals in other sectors — cases involving BP, Volkswagen, GM, and Boeing — only one person received a prison sentence.  

Why do prosecutions of corporate crime so often fail? Buell said that in cases like securities fraud, where complex financial transactions are being performed between sophisticated parties, it’s difficult to establish the high level of criminal intent required for a conviction – even with cooperation from co-conspirators and documentation that included explicit records of conversations.

“Even in the strongest cases, where you had highly skilled prosecutors and compelling proof of wrongdoing, judges and juries rejected the government’s arguments,” he said.

In the cases involving the oil, aerospace, and automotive industries, judges and juries were reluctant to blame corporate wrongdoing on one person, especially a mid-level manager who defense could argue was just following orders from a superior or was being scapegoated for more pervasive misconduct. 

The dispersal of decision-making and division of labor in large, complex organizations makes it hard to pinpoint a single individual who’s fully responsible for any particular outcome, Buell notes. And while he and the rest of the Enron prosecution team did succeed in convicting many top officers after its December 2001 bankruptcy, Enron was a unique case.

“In a lot of ways, people thought Enron should have been sort of a template for all the cases that came afterwards,” Buell said.

“But it was a very unusual case in that you had numerous executives in the C-suite actually directly participating in decisions to manipulate the accounting and financial structure of the company in a way that made it deeply misleading.

“Enormous resources were spent on that case and it took more than four years from start to finish. It was two years before anybody was even indicted. And there were some lucky breaks. Some really significant people cooperated — people who were inside the meetings that really mattered — and that doesn’t always happen.”

Better alternatives for deterring corporate crime  

Buell suggests several ways to better address and discourage corporate crime than pursuing more indictments. One possibility is enhancing civil enforcement mechanisms to include stronger deterrents like higher financial penalties. The burden of proof is lower for civil liability, he notes, requiring only recklessness or negligence in securities cases.

It’s also worth considering better incentives for whistleblowers to report violations within their organizations. And corporate compliance systems should evolve to become more effective at preventing misconduct; Buell notes that incentives to make profits by violating the law are often stronger than the controls against it.  

Perhaps the most effective way to prevent corporate misconduct, he says, is to make it less appealing by strengthening industry-specific regulation — whether for sales of derivative securities, oil drilling, or coal mining — rather than relying on prosecutors to enforce weak laws after the fact through corporate settlements and indictments.

“It’s very often the case that the bad conduct is pursued in the shadow of an ineffective regulatory framework and the behavior is often engineered to either steer around the framework or directly exploit it in some way,” Buell said.

“The lesson from that should be to create regulatory frameworks that are tighter and more effective so that it’s not possible to do that. But that’s obviously a perennial problem in our legal and government system. Regulations are always, by definition, sort of one step behind.”