The Low Price of Fraud

http://www.huffingtonpost.com/2011/04/07/sec-takes-lighttouch-appr_n_846289.html

The attached article from the Huffington Post describes the  increasing trend of financial services companies using a "risk/reward" calculation to justify unethical business decisions.  As was all too common during the financial meltdown, the nation's fourth-largest bank agreed to pay an $11 million fine this week to settle federal charges that it misled investors by hiding critical facts and charging them excessive prices on portions of two billion-dollar securities during the height of the housing boom.

Or put another way:  for a mere $11 million, one of the world's biggest investment firms was able to violate basic investor protection rules, defraud its customers, not admit wrongdoing, avoid a trial and likely pocket the profit off similar deals. Interestingly, none of this activity was, per se, "illegal".  But by anyone's standards, including the regulatory oversight agencies involved, it was all unethical. 

Facing the prospect of making billions in shady deals, with only a few million in fines possible if caught, this risk/reward structure creates an environment that incentivizes unethical behavior.   How, then, can we promote an ethical business culture with such built in disincentives to do what's right?  One way is to vastly increase the possible fines for violating securities regulations that can seriously harm the public.  Another way is for the SEC, and other federal and state agencies and regulatory boards, to increase their utilization of independent corporate compliance monitoring in a bid to ensure wholesale reform within public companies and better protect the public. Here's how it works:

• A company violates a law, regulatory rule, or otherwise violates the public trust
• The oversight agency conducts an investigation and threatens to suspend, debar, fine, or otherwise punish the company in a significant manner
• In order for that company to continue providing service to the public or the government in a manner that protects the taxpayer, the oversight agency agrees to allow the company to continue operating IF it agrees to regular monitoring by an outside, independent organization that the the government hires
• The independent corporate compliance monitoring firm monitors the company's performance against a number of areas specified by the government, and regularly reports back to the government on the sate of the company's compliance
• The company, NOT the government or the taxpayer, pays for the cost of the compliance monitoring service

Through increased use of independent corporate compliance monitoring, taxpayers can be better protected from the unethical actions of individuals or companies; companies can continue to operate, provide jobs, and bolster the economy; and the government can continue to benefit from their services while  ensuring compliance with critical rules designed to ensure a fair and equitable marketplace.