More on Fraud

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Upon rereading it, I think I wasn’t very clear in my last post.  I can’t comment directly on the AIG case because it is so cryptic, but I want make a more specific comment on status crimes.  I am uncomfortable with the current state of financial/tax/economic sphere crimes.  I understand the difficulty being addressed–intent is hard to prove so if you make things that are likely to be associated with fraud crimes, you get to punish fraud without having to prove that the intent to deceive.  This works fine so long as everyone can reasonably be expected to know or understand what you can do to get into trouble. 

The problem is that things have gotten ridiculously complicated, with the rules changing from day to day.  Like Will at Crescat Sententia says:  "I hate doing my taxes– not because the counting, figuring, or filing bothers me (on the contrary), but because the whole process fills me with sheer terror that there is some unknown rule or unclear definition (contained nowhere on the form) that will subject to me criminal and financial liability."  This isn’t just true in tax, but in many areas of corporate life.  The really big corporations can usually fend for themselves, but small concerns are rightfully worried that they can innocently run afoul of some crazy regulation or another. 

I’m not sure there is much to be done about it.  Maybe this is just the kind of silly thing that I worry about. 

9 thoughts on “More on Fraud”

  1. hmph. what gets AIG in trouble is deliberately structuring transactions in a way which don’t justify the tax treatment. While i am now deeply over my head, if the transaction is reported and taxed as insurance but actually bears the characteristics of a loan, it’s pretty hard to plead ignorance.
    The difference is in sophistication. Neither you nor Will have anything to fear criminally so long as you make some good faith effort to report your income and pay taxes. Since AIG was a leader in inventing sham transactions, they have a pretty steep uphill argument to claim that they didn’t have the sophistication to understand the tax consequences of their actions.

  2. I’m curious what crimes you’re thinking of, Sebastian. Outside of SOx (and don’t get me started on that) and a few securities issues, virtually all claims of fraud still require evidence of an intent to deceive.

  3. Sebastian: is your worry something akin to this (about Montesquieu; just quoting me since I know where to find it):

    “Liberty involves living under laws that protect us from harm while leaving us free to do as much as possible, and that enable us to feel the greatest possible confidence that if we obey those laws, the power of the state will not be directed against us. … The laws should be constructed to make it as easy as possible for citizens to protect themselves from punishment by not committing crimes. They should not be vague, since if they were, we might never be sure whether or not some particular action was a crime. Nor should they prohibit things we might do inadvertently, like bumping into a statue of the emperor, or involuntarily, like doubting the wisdom of one of his decrees; if such actions were crimes, no amount of effort to abide by the laws of our country would justify confidence that we would succeed, and therefore we could never feel safe from criminal prosecution. Finally, the laws should make it as easy as possible for an innocent person to prove his or her innocence. They should concern outward conduct, not (for instance) our thoughts and dreams, since while we can try to prove that we did not perform some action, we cannot prove that we never had some thought. The laws should not criminalize conduct that is inherently hard to prove, like witchcraft; and lawmakers should be cautious when dealing with crimes like sodomy, which are typically not carried out in the presence of several witnesses, lest they “open a very wide door to calumny” (SL 12.6).”

    If so, it was a major theme of enlightenment political philosophy.

  4. What Hilzoy quoted.
    The AIG dispute is not about status crimes NY Times business section article. It’s allegedly about altering documents after the fact in order to change the tax treatment of a transaction. It’s bad enough that these sharpies find ways to open semi-legitimate holes in the tax structure to which, like reverse platelets, corporate lobbyists then rush in order to insure that the bleeding continues as long as possible. Here someone is just stealing from the tax bank (if its true).
    The fear of being burned by arcane rules is a reasonable one (in which case ignorance of the law should at least be mitigation). Usually, the problem is lessened by having one tier of penalties for a violation (an infraction like traffic laws) and another when intent can be proven.

  6. I’m not sure what you want me to respond to. I certainly think that judges can be impeached for abuse of power–though the Schiavo case wasn’t abuse of power. Impeachment is part of the checks and balances system which has fallen into disuse with respect to the judiciary. Is that what you are asking me about? I’m not sure how this relates to the topic at hand or if there is some linkage that I’m missing.

  7. Sebastian,
    It’s hard, though not impossible, to disagree with the proposition that the laws should be clear. As I commented in the other thread, I am a bit unsympathetic to business complaints about the complexity of tax laws, since much of the complexity is a result of business seeking special favors.
    Some similar considerations apply to accounting rules. Corporations, at least public ones, want to manipulate the earnings they report as much as possible. So they lobby for various special treatments and the like. When they then get caught up in the complexities it’s hard to feel that they were wronged.
    But there’s another issue here that bears attention. Let’s not confuse complex laws with complex dealings which violate reasonably clear laws. Sometimes, it seems to me, the complexity arises not out of ambiguous rules, but out of the difficulty of untangling complicated transactions that, once untangled, seem clearly wrong. I think this was the case with many of Enron’s dealings with its partnerships for example.
    As for AIG, I’m not sure exactly what they did either. I find it interesting that there has very little in the way of an explicit explanation in the newspapers of the transactions being questioned, though it appears they were claiming to be buying reinsurance when the risks were not in fact being transferred. If that’s right, it’s clearly a violation. The fact that they did it in a complicated way doesn’t make the law vague, it makes the crime, if there was one, hard to discover. By way of analogy, imagine an exceptionally clever embezzlement scheme which is very difficult to untangle. That such schemes are possible doesn’t mean that the laws against embezzlement are unclear, it means that criminals are sometimes good at covering ther tracks.

  8. SH, my point was that K is saying x is understandable because judges have been activist, but x is bad. But again this is definitely off-topic – sorry for the interruption.

  9. An interesting sidelight to the A.I.G. story appeared in Sunday’s NYT Business section: the bankruptcy of Reciprocal of America, a malpractice insurer.
    If the article is accurate, there is little question that fraud occurred as part of this debacle:

    Reciprocal’s former chief executive, Kenneth R. Patterson, and a former executive vice president, Carolyn B. Hudgins, have already pleaded guilty to federal fraud charges.

    Reciprocal had a subsidiary incorporated in Bermuda, an executive-owned yacht used to conduct business meetings on the Chesapeake Bay (jocularly referred to as “Chesapeake Audits”), secret transactions, misleading financial reporting, the works.
    Read the article. This was far from a victimless crime.

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