White-Collar Time for White-Collar Crime

As someone who spent nearly a decade as an FBI agent investigating fraud, I could hardly be described as being soft on crime. In a civilized society, criminals must be punished for their transgressions. But if the punishment doesn't fit the crime, it's self-defeating and even barbaric. That's the situation in which we now find ourselves with regard to high-profile white-collar criminals.

American prosecutors and politicians who seek to be perceived as tough on crime insist that we must send the public a message by imposing stiff sentences. The notion is that if we see others punished, we're less likely to commit crime ourselves. This is what criminologists call "general deterrence." Will Hoover of Cherry Creek, Colo., received a 100-year prison term for a Ponzi scheme in which investors lost $13 million. Jeffrey Skilling of Enron got 24 years. Bernie Ebbers of WorldCom was sentenced to 25 years, and John Rigas of Adelphia, 15 years.

The theory of general deterrence has been around for ages but what we learned in the 20th century from various scientific studies is that it just doesn't work well, if at all. The average sentence for fraud is 16 months in the United Kingdom and 23 months in Australia. Indeed, the rate of incarceration in the United States is four times that of the world average yet our crime rates are among the highest when compared to other countries.

The reason that lengthy prison sentences don't act as deterrents is simple. Imagine you're a corporate executive with a desperate need to keep your company's share price up and you have decided to cook the books. Would you do it if you knew that you would spend a mere five years behind bars? Of course not; you'd commit the crime only if you were convinced that you wouldn't be caught. Accordingly, the possible punishment is rarely a serious consideration in the mind of the potential offender.

There is a more effective and equitable way to punish errant executives. First, they should be stripped of all of their assets, which could then be used to compensate for victims' losses. (In an example of perverse justice, convicted '90s junk bond king Michael Milken walked out of jail with about $600 million.) Second, high-level managers should serve a modest stretch in prison to teach them some humility. Third, they should then be returned to the workforce but with a twist.

Many white-collar criminals are highly talented businesspeople who are capable of legitimately earning good money for themselves and their companies. The twist is that they shouldn't be permitted to keep their earnings; excess funds over minimum wage should go toward restitution. In this way, we would largely punish economic crime with economic penalties. Skilling will never be able to pay back the deserving shareholders of Enron by making license plates at 63 cents an hour for the next 24 years. Furthermore, keeping him locked up will cost taxpayers more than a million dollars, adding insult to injury.

I would gladly support long sentences if they worked to reduce crime. But they don't. According to data by the Bureau of Justice Statistics, three-quarters of released inmates re-offend and usually commit more serious crimes than the ones that landed them in prison in the first place. The people who really belong behind bars are the ones who are a physical threat to us -- those who kill, rape, rob, and maim. For everyone else, there should be alternative methods of punishment that don't also punish taxpayers and victims.

Furthermore, if we are serious about preventing frauds, we'd be wise to take a clue from the neighborhood police. When crime goes up in a certain area, more officers are shifted to that location; simply increasing their numbers reduces crime. But in the business world, we don't have enough -- or the right kind -- of corporate cops to be truly effective.

We sorely need to assign true anti-fraud specialists such as Certified Fraud Examiners as part of the audit teams. Their sole responsibility would be to actively seek out material fraud. But like cops on the beat, their mere presence could help reduce fraud, which in turn would add a measure of protection for all of us.

Joseph T. Wells, CFE, CPA, is the founder and Chairman of the Association of Certified Fraud Examiners in Austin, Texas. 

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