DOJ Trusts Wall Street To ‘Police Itself’ As It Takes A ‘Softer Approach’ To Corporate Crime

Many of the corporations responsible for nearly bringing down the global economy escaped prosecution because of a set of guidelines adopted by the Justice Department in summer 2008. The New York Times recently reported on the effect of this “softer approach” to white-collar crime. The guidelines were well-known to federal prosecutors but not to the public at large, and help explain “the dearth of criminal cases despite a raft of inquiries into the financial crisis”:

Though little noticed outside legal circles, the guidelines were welcomed by firms representing banks. The Justice Department’s directive, involving a process known as deferred prosecutions, signaled “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors,” Sullivan & Cromwell, a prominent Wall Street law firm, told clients in a memo that September.

The guidelines left open a possibility other than guilty or not guilty, giving leniency often if companies investigated and reported their own wrongdoing. In return, the government could enter into agreements to delay or cancel the prosecution if the companies promised to change their behavior.

But this approach, critics maintain, runs the risk of letting companies off too easily.

“If you do not punish crimes, there’s really no reason they won’t happen again,” said Mary Ramirez, a professor at Washburn University School of Law and a former assistant United States attorney.

Although the rules were adopted under the Bush administration, Obama administration officials have made no move to rescind or modify them. Their decision to let big banks and corporations continue to “police themselves” is shocking, given the large role deregulation played in the financial crisis.

While “deferred prosecutions” were used before the financial crisis, they’ve become an official alternative for the DOJ and Securities and Exchange Commission at a time when many Americans believe the government shouldn’t be so quick to let companies off the hook for misdeeds that can affect millions of families.

The financial crisis cases brought by the S.E.C. have “rarely named executives as defendants,” and no corporate players have served jail time for their role in the risky behavior and outright fraud that brought the global economy to its knees.

One striking effect of this more lenient strategy is that government lawyers now frequently “outsource” investigations to the companies themselves. Companies that report back to the government are usually spared prosecution — as was the case with a home building firm that engaged in mortgage fraud.

The discrepancy between how federal prosecutors handle corporate crime compared to other kinds of crime is stark, and — we now know — embedded in DOJ rules themselves. The government doesn’t trust the rest of the population to police itself, but corporate executives are singled out for special treatment. That corporations are so frequently spared from prosecution in the wake of the recession is a reminder of the uncomfortably close relationship between government and industry that continues to this day.