VW is a great test of whether DOJ really will put white-collar crooks in jail

Less than two weeks ago, to a blare of orchestrated praise, the U.S. Department of Justice announced that it was getting serious about putting white collar criminals in jail. This after more than a decade of giving elite crooks stay-out-of-jail-free cards.

And now, as if by divine intervention, comes a case that puts the DOJ’s newly discovered spine to the test. The culprit is Volkswagen, which has admitted to installing software in nearly a half-million diesel VWs and Audis that produced fraudulently low readings on emissions tests.

The subterfuge went on for years and was specifically denied by VW after it was uncovered by a nonprofit environmental group. It allowed the vehicles to emit as much as 40 times the permissible levels of nitrogen oxides, which the EPA says contribute to smog and ozone buildup and can lead to “increased asthma attacks and other respiratory illnesses that can be serious enough to send people to the hospital [and] have also been associated with premature death due to respiratory-related or cardiovascular-related effects.�

As Mark Kleiman of UCLA points out, VW’s actions weren’t committed by phantoms or happened by chance: “This wasn’t one rogue engineer or engineering group at work. People up and down the chain had to be party to the crime.�

The estimates of VW’s financial liability runs as high as $18 billion in fines, which might be enough to put the company out of business. If not, however, VW would eventually chalk up the sum to the cost of doing business, change its auto design, and go on its merry way. The lesson would be that even a staggering fraud can be survived, so don’t get caught.

If VW executives land in jail, however, things might be different.

That brings us back to the DOJ’s “new� policy and the flaws of the old. According to a Sept. 8 memo issued by Deputy Atty. Gen. Sally Yates, henceforth corporations won’t be given any credit for cooperating with DOJ investigations unless they “provide all relevant facts about the individuals involved in corporate misconduct.� Civil and criminal investigators are to “focus on individuals from the inception� of their probes. And DOJ lawyers aren’t to agree to settlement terms that include agreements to dismiss charges against individual corporate officers or employees.

As has been pointed out by William K. Black, who as a thrift regulator in the 1980s put plenty of S&L executives in prison, the Yates memo is an admission that DOJ’s “experiment in refusing to prosecute the senior bankers that led the fraud epidemics that caused our economic crisis failed.� Not a single high-level banker has been convicted. Allowing them to get away with “absolute impunity,� Black says, “will go down as the Justice Department’s greatest strategic failure against elite white-collar crime.�

The failure to prosecute bankers has been part of a much broader winking at white-collar offenses of all sorts. According to an analysis by David Cay Johnston of data from the Transactional Records Access Clearinghouse at Syracuse University (see accompanying graphic), federal white-collar prosecutions have fallen by about 37% over the last two decades, to fewer than 6,900 from nearly 11,000 in 1995, under Bill Clinton.

During much of the George W. Bush and Obama administrations, the DOJ not only avoided criminal prosecutions of individuals, but was shy about criminal prosecutions of corporations themselves. Its preferred strategy was to extract steep financial penalties and deferred-prosecution agreements in which corporations pledged to institute internal compliance programs and not to repeat their offenses.

Every expert in white-collar crime, including many in the DOJ, knew that this would have zero deterrent effect. The yield, as I observed in 2013, was a series of big-number penalties that meant little to the corporate managements that signed off on them and were paid by shareholders anyway.

A top-level DOJ official recounted for an audience in 2009 the words of a corporate executive to a former assistant attorney general: “As long as you are only talking about money, the company can at the end of the day take care of me . . . but once you begin talking about taking away my liberty, there is nothing that the company can do for me.�

Yet the financial penalties kept flowing. The global bank HSBC paid a record $1.92 billion to settle federal accusations that it operated a huge money-laundering scheme for Mexican drug dealers and Middle Eastern terrorists. BP agreed to pay $4.5 billion and plead guilty to 11 felony counts in connection with the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. That was the biggest federal criminal penalty ever, but it barely registered on company ledgers, and none of the executives who were in charge when the felonies were committed were brought to book.

The trend continued even after the issuance of the Yates memo. General Motors last week settled for $900 million federal criminal charges that it connived in hiding a lethal flaw in its auto ignition switch for as long as a decade. No individual executives were named.

Will the Yates memo change things? Black is skeptical. DOJ attorneys and FBI agents haven’t even been trained to understand or prosecute the elaborate accounting frauds that underlie so much corporate wrongdoing. “Words are cheap,� he writes.

What’s most distressing is that the DOJ’s old policy violated common sense. Corporations don’t commit crimes; persons do. UCLA’s Kleiman quotes the British author C.S. Lewis, who wrote in his classic work of morality “The Screwtape Letters� that “the greatest evil� is done not in concentration camps, but “in clean, carpeted, warmed and well-lighted offices, by quiet men with white collars and cut fingernails and smooth-shaven cheeks who do not need to raise their voices.�

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