When $1.6 billion isn’t enough

December 2nd, 2010

Everyone knows money is a powerful dissuader.

Think of parking tickets.  If there were no penalty, most people would be unlikely to feed the machine with a few quarters. But it’s a small price to pay when the ticket fine is $30 (or $50 if you live in DC).

A variety of activities ranging from smoking to carrying durians is banned on Singapore's Mass Rapid Transit system.

Any Economist will tell you that, by design, compliance with laws is a mix of two important factors.  One: the penalty that results if the offender is caught and 2: the probability of the offender getting caught in the first place.  If the fine is proportional to the crime, but the probability of being caught is almost certain, few will risk it.  In the same way, if the probability of being caught is low, but the penalty is very high, again few will risk it.

Through its laws and enforcement, Singapore has hit both sides of the coin, very hard.  A variety of activities considered harmless in most other countries have been criminalized, for example littering, jaywalking, and spitting and they are heavily enforced.  The U.S. State Department warns American travelers that Singapore has a “mandatory caning sentence for vandalism offenses.”  The strict laws and enforcement of those laws does pay off in some ways.  Singapore enjoys one of the lowest rates of crime in the region (in fact, Japan is the only country with lower crime in Asia) and these statistics are particularly impressive when Singapore is compared to other emerging markets in a similar state of development.  Then again, if the ACLU were in Singapore, they might have something to say about the mandatory caning and death penalties.

But Singapore has realized something here that—while questionable in many ways—is an even more powerful dissuader than money.  The problem with the penalty/probability equation—at least when it comes to financial penalties—is that some people aren’t going to be dissuaded by enormous fines, because their incomes are proportionally larger.  It’s a problem faced with many crimes, and recently this issue was raised with the Foreign Corrupt Practices Act (FCPA).

The FCPA, which makes it unlawful “for persons and entities to “make payments to foreign government officials to assist in obtaining or retaining business,” has experienced a relatively large number of prosecutions by the U.S. Justice Department and has received praise from the OECD for its comprehensiveness.  But as Senator Arlen Spector (D-PA) pointed out on Tuesday, a multi-million dollar criminal fine may be a lot of money to most Americans, but it “doesn’t amount to a whole lot” for the corporations committing the crimes.  For example, Senator Spector pointed to Siemens AG, which recently paid $1.6 billion for widespread bribery overseas, but in comparison to Siemens’ yearly revenue of over $100 billion the figure is not startling large.  The only solution, Spector says, it jail time.

He has an excellent point; one which should not be overlooked.  While the FCPA is a comprehensive and forceful piece of legislation and the Justice Department has been serious about enforcement, it will not necessarily be a powerful dissuader if the costs of being caught aren’t high enough.  As it is, many corporations with large revenues could take fines, even enormous ones, as “the cost of doing business,” rendering the FCPA ineffective at preventing the crimes it seeks to thwart.

So for that, I must agree with Senator Spector.  When appropriate, individuals should be charged and sentenced with jail time for violating the law.  Particularly when their crimes are heinous and money isn’t a strong enough dissuader.

Written by Ann Hollingshead

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