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Photographer: Patrick T. Fallon/Bloomberg

Can $300 Billion Make Companies Behave?

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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Are U.S. authorities being overzealous in their efforts to extract money from corporate miscreants? Actually, the right question might be why, despite the advent of multi-billion-dollar penalties, companies keep breaking the law.

A new batch of fines -- most notably the Justice Department's $14 billion opening bid to settle the mortgage-related transgressions of Germany's Deutsche Bank AG -- has caused a lot of consternation. Some central bankers have worried out loud that the sheer volume of legal costs could be stunting global growth.

Until recently, though, it's been hard to get a comprehensive picture of the nature and magnitude of corporate misdeeds and their costs. Enter a group called the Corporate Research Project, which has built a database covering penalties imposed by more than 30 U.S. authorities, from the Justice Department to the Food and Drug Administration.

The total is impressive: Over the past six years, it adds up to about $300 billion. Financial institutions accounted for the largest share by far -- more than $177 billion, for transgressions ranging from lying about their borrowing costs to laundering money for drug cartels. Here's a chart showing the 20 companies with the largest legal bills :

Top 20 Payers of U.S. Fines
 
Source: Corporate Research Project of Good Jobs First

You'd think such steep costs would have a deterrent effect. Yet it's hard to see that in the data so far. Even after paying billions for their misbehavior around the 2008 financial crisis, banks kept getting into trouble (JPMorgan Chase & Co. alone has racked up 41 separate fines since 2010).

The number of serious violations by financial institutions -- those that resulted in penalties of more than $1 million -- kept surging through 2015, with a possible decline in early 2016 that's still too brief to call a trend. Here's how that looks:

Financial Institutions' Violation Count
 
Source: Corporate Research Project of Good Jobs First

What to do? Brandon Garrett, a law professor at the University of Virginia, has offered some ideas worth considering. Prosecutors, for example, should explain publicly how they calculate fines, including discounts for cooperation: The opportunity to save billions of dollars could motivate corporate boards to provide the information needed to prosecute individuals, which in turn could have a bigger deterrent effect. Giving judges a bigger role in overseeing deals -- and appointing independent monitors who make their progress reports public -- could also give companies more incentive to follow through on reforms.

In any case, the root problem is not the size of fines, but the behavior that engenders them. Taking a pass on corporate fraud would be no way to stimulate the economy.

  1. This includes only those fines that exceed $1 million. Also, totals for companies include fines levied on companies they have acquired.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net

To contact the editor responsible for this story:
Paula Dwyer at pdwyer11@bloomberg.net