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Pinprick: Six Reasons Why Civil Fines Don't Deter Corporate Wrongdoers

David Callahan

JP Morgan Chase has now been hit with a total of $20 billion in fines and restitution for a variety of misdeeds over the past decade—a record total by far for any business. Is the bank reeling in shame and pain? Has it gotten rid of the CEO who incurred all those penalties? Has its stock sunk to historic new lows?

No, no, and no.

The bank's stock price is actually higher now that it was before this avalanche of fines began—indeed, the stock is near a five-year high. Jamie Dimon's job is seemingly secure. And little stigma surrounds the bank's wrongdoing in our broader society: your average Chase customer has no idea that they are dealing with a repeat offender that has betrayed the trusted of investors and consumers again and again.

None of this is any surprise. Big civil fines—with no criminal action—simply don't inflict much pain on large corporate entities or super rich individuals. And, for that reason, they don't deter future wrongdoing.

Here are three reasons why even very large fines are such a weak form of punishment:

Fines Are Paid by Shareholders, Not Wrongdoers

Imagine you get a speeding ticket and somebody else pays the ticket. Would you worry about getting more speeding tickets? Probably not. Better yet, imagine that somebody pays that ticket years from now when you've already had your fast and furious fun. That's the situation with corporate fines. Individual cowboys and rogues make big bonuses by breaking the rules and, at some future point in time, their company gets hit with a fine that is paid out of stock or future earnings. The wrongdoers don't pay a cent, and indeed may well be long gone. It's the shareholders who take the hit.

The Fines Aren't Big Enough

If someone hits you with a bat, it hurts. If you someone hits you with a chopstick, it doesn't hurt. Government agencies tend to use chopsticks not bats. JP Morgan Chase made $16 billion in profit last year, and many more billions during the long boom years when it's bad behavior occurred. In that context, $20 billion in fines and homeowner relief (which is nearly half that total) is actually not a big hit. The same can be said for the large fines that have been meted out to other banks and also Big Pharma companies in recent years. In effect, these fines are manageable enough given corporate earnings that they can be seen as a cost of doing business.

Fines Can be Paid Out Over a Long Period

A $20 billion hit may sound staggering, but the costs of fines can easily be stretched out over many years. Either because the government allows wrongdoers to pay fines and restitution in installments, which is often the case, or because companies can borrow money and finance the fines over time.

Fines May be Tax Deductible

Under tax law, civil penalties can often be written off as a business expense. Which lowers the net amount and softens the blow.

Fines Often Are Never Fully Collected

Just because a company gets fined, doesn't mean it actually pays that fine. While high profile fines may get paid, lots of lesser fines are never fully collected by the government.  According to an article published in Yale Law & Policy Review by Martin Pritikin and Ezra Ross, the government was owed more than $35 billion in "uncollected criminal debt" in 2006—a figure that soared from $5 billion in 1995 and is surely larger today.

Fines Don't Tarnish Corporate Brands

Quick, name the drugmaker that has been hit with the biggest number of civil fines by the U.S. Justice Department? Of course, you can't, and there's a reason for that: The imposition of fines tends to be a one-day news story that may not even make it out of the business section. Most consumers and investors don't notice, so companies pay little in the way of their reputation.

So if fines don't deter wrongdoing by executives and bankers, what might? Oh, I don't know: maybe prison.