Is the regulation of the financial sector sufficient to prevent white collar crime and corporate fraud? Are markets capable of self-regulating in this aspect? Why or why not?
Answering the second question – are markets capable of self-regulating – first, I would have to conclude, having spent six years working on financial crimes on the staff of the U.S. Senate Committee on Banking, that markets should never be allowed to police themselves. There’s an old saying that ‘the business of business is business,’ meaning business exists to make money, and anything else is a distraction. While there are examples of industry organizations, such as the former Financial Services Authority in Great Britain and the Financial Industry Regulatory Authority in the United States, which is a securities industry organization established to police itself, the welfare of the public at large cannot rely upon the efforts, no matter how diligent, of such organizations. Financial services industries exist to engage in capitalistic practices that may benefit many people, but which will invariably push against the boundaries of appropriate conduct and weaken self-regulatory oversight efforts in deference to its membership’s complaints about strict regulations. Even with official governmental agencies established to provide oversight of the financial services industry, banks and other components of that industry will inevitably participate in activities that run afoul of the intent, if not always the letter, of laws designed to protect the public. I know for a fact that, absent federal laws and federal law enforcement efforts, many banks would willingly engage in unethical business practices that would damage their and their customers’ financial interests if left unchecked. The financial services industry almost always opposes laws intended to restrict its freedom to engage in practices that do not have the welfare of customers or the greater public at heart. Those states with large financial services industries, like Connecticut, use their congressional representatives to try and weaken existing laws that exist to safeguard the financial sector. Banks habitually argue that anti-money laundering laws, for instance, impose a financially costly bureaucratic burden on their operations, as they are required to file reports with the federal government whenever customers process transactions involving more than $10,000 in cash and to report on “suspicious” transactions (i.e., those involving customers who make financial transactions that do not fit their normal profile, possibly indicating that the source of the money in question was attained through illicit means, such as through drug trafficking). Absent federal statutes requiring such actions, they would not occur, and criminals would have no problem laundering ill-gotten money through the otherwise legitimate banking system.
With regard to whether existing laws and regulations governing the financial sector are sufficient to prevent white collar crimes and corporate fraud, the answer is no, and they never will be. Activities such as murder, rape, robbery, and extortion have been violations of laws for centuries, yet such crimes continue to be carried out every day. Financial crime is no different. Greed, psychology, a need to extricate oneself from debt, and other factors will continue to motivate some individuals to commit fraud and other financial crimes. Penalties can, and sometimes should be harsher for some individuals convicted of white collar crimes, but individuals carrying out such acts know what they are doing and understand the risks. Some believe they will never be caught, some know a day of reckoning is coming, but feel they have to commit a crime anyway, for example, to pay off debts. Heavy fines and prison sentences can only go so far in deterring would-be criminals; many will commit financial crimes because they make bad decisions, and no punishment will completely eliminate such decisions and such crimes.