A lack of effective regulation and enforcement by the U.S. government allowed financial fraud to flourish during the last decade and set the stage for the subprime mortgage crisis, says Henry Pontell, UC Irvine professor of criminology, law & society.
He testified recently at a hearing of the Senate Judiciary Committee’s subcommittee on crime and drugs, advocating harsher criminal penalties for perpetrators of financial fraud. The panel was considering whether changes to financial disclosure laws could facilitate prosecution in such cases.
“The war on drugs snared a vast horde of financially marginal people,” Pontell says. “There has been no similar war on financial thugs.”
Pontell has studied white-collar crime for nearly 30 years and is the co-author of Profit Without Honor: White-Collar Crime & the Looting of America. He teaches a UCI course, “White-Collar & Corporate Crime,” that includes case studies of such high-profile bandits as Martha Stewart, Jeffrey Skilling and Michael Milken.
According to Rasmussen College, an institution that compiles an annual list of “coolest college courses,” Pontell “knows more about white-collar crime than anyone besides an ex-convict.”
And what he has to say about it is sobering. Considering all the industrial accidents, environmental pollution, fiduciary fraud, unsafe products and medical malfeasance, Pontell says, the impact of executive-level crime is much greater than that of common street crime.
Furthermore, the failure to create effective corporate compliance systems, enforce criminal laws and boost regulatory oversight will lead to more financial debacles down the line, he warns.
“We really haven’t learned anything from the savings-and-loan crisis of the 1980s,” Pontell says, referring to the insolvency of more than 700 financial institutions, which cost U.S. taxpayers about $150 billion. “Fraud played a central role in that crisis and the current financial meltdown.”
Studies of the savings-and-loan calamity, he says, have shown that law enforcement and criminal justice agencies weren’t able to investigate and prosecute suspected offenses because of a shortage of personnel and resources.
Providing regulatory and enforcement entities with the support and resources needed to prosecute financial crimes is crucial in preventing future misdeeds by banks and other large institutions, Pontell says.
“There’s been a 36 percent staff reduction since 9/11 in FBI agents dealing with white-collar crime, and the number of criminal cases brought by the bureau has dropped by slightly more than 25 percent during the same period,” he says.
During the peak of the current crisis, Pontell says, the FBI assigned about one-fifth as many agents to investigate mortgage fraud as it assigned to investigate savings-and-loan fraud – even though the financial toll of the current debacle is 30 times greater than that of the 1980s crisis.
Enforcing anti-fraud laws and empowering the Securities & Exchange Commission to monitor companies and impose compliance systems is the only way to prevent further financial meltdowns, Pontell says.
“As long as dishonest business and accounting practices thrive and market bubbles expand, we can expect to see some type of financial crisis about once every eight to 10 years,” he says.