Jan. 22 (Bloomberg) -- A spat in New York state over $613 million in settlement money from JPMorgan Chase & Co. raises a question much larger than local politics: Should law enforcement officials be allowed to do what they want with the money they extract from suspects and defendants?
The New York case is the latest skirmish in a long-running battle between Governor Andrew Cuomo and Attorney General Eric Schneiderman. Schneiderman claims sole discretion over the funds, which the settlement allows him to spend in part on avoiding “preventable foreclosures” and in part on expanding his department’s financial-crime-fighting efforts. Cuomo wants the money, part of a larger $13 billion nationwide mortgage-fraud settlement, to go through the state budget. This week, Schneiderman agreed to split the first $163 million installment with the state, which plans to use it for housing programs.
Schneiderman appears to be within his legal rights. State law vests the attorney general with the authority to distribute restitution. The logic is that when the prosecutor is acting on behalf of a group -- in this case those harmed by bad mortgages -- the money should go to redress the victims. It’s a power that Schneiderman’s predecessors, including Cuomo and Eliot Spitzer, have used in cases ranging from student-loan fraud to “payola” in the music industry.
Legal as it may be, this practice creates some undesirable incentives. Prosecutors are tempted to choose money over truth: Why spend the time and resources to establish facts, or to pursue separate criminal charges, when a quick settlement offers resources that can be used for political gain and to pad your own budget? In cases of corporate misbehavior, attorneys general may focus more on cutting lucrative deals than on getting companies to change their behavior. As a result, cash-rich businesses become vulnerable to shakedowns, victims may be deprived of evidence that they could use to pursue civil claims, and actual criminals might get a pass.
The perils of for-profit public enforcement are not limited to New York, to the financial industry or to state attorneys general. Numerous states, and even some federal agencies, have rules allowing law enforcers to “eat what they kill” -- that is, channel portions of the money they recover to their own budgets. The abuse of civil-forfeiture laws, which allow police to keep property seized from suspected drug dealers, offers an example of where such monetary incentives can lead. There are documented cases across the nation where local police, aiming to generate income for their departments, have confiscated cash and other valuables from people whose guilt they never proved.
The profit motive in law enforcement has gone too far. Some state legislatures already place limits on the amount or percentage of settlement money that can be channeled to prosecutors’ budgets -- an example other states should follow. There may also be ways to ensure the people’s elected representatives have a bigger say in the way large settlements are spent. In the meantime, judges should subject agreements to greater scrutiny. Many attorneys general are elected, of course, but their interests don’t necessarily align with those of the victims or of the broader public.
Prosecutors absolutely should have enough resources to investigate and deter misbehavior, in the financial sector and elsewhere. Those resources, however, shouldn’t depend too heavily on prosecutors’ success in extracting money from the people and industries they oversee.
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