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Do lobbying and campaign contributions help corporate fraudsters?

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Though those of us who study money in politics tend to focus on its effects on legislation and regulation, two recent research papers suggest another way in which money might have an effect: it helps companies and executives who commit fraud evade detection and avoid harsh penalties.

In one paper, “Corporate Lobbying and Fraud Detection,” Frank Yu and Xiaoyun Yu find that firms that lobby evade detection for fraud almost four months longer than non-lobbying firms and are 38% less likely to be detected for fraud as compared to non-lobbying firms.

In another paper, “Political Contributions and the Severity of Government Enforcement,” Sarah Fulmer and April Knill find that executives at firms who made PAC contributions get lighter sentences than those who don’t.

In other words, being politically engaged appears to help firms and individuals get away with fraud for longer and, even when they are detected, reduce the severity of punishment.

The “Corporate Lobbying and Fraud Detection” paper studied lobbying from 1998 to 2004, comparing the 239 firms that had committed financial fraud with those who hadn’t. The researchers found a few very interesting things:

  • On average, firms that committed fraud spent $3.48 million lobbying a year between 1998 and 2004, as compared to $1.97 million for firms that did not commit fraud. (So fraudulent firms spent 77% more, on average.)
  • Firms that committed fraud increased their lobbying expenses after committing the fraud, by about 29%, on average.
  • Overall, 17% of the frauds were detected by regulators (as opposed to analysts, stakeholders, insiders, etc.). But among the firms who lobby, just 12% of the frauds were detected by regulators.
Yu and Yu “conjecture that lobbying has a strong effect on detection by regulators.”

The “Political Contributions and the Severity of Government Enforcement” paper looks at punishment instead of detection: How harshly are perpetrators of financial fraud dealt with?

Fulmer and Knill find that “contribution from a PAC in the first year of the fraud results in the accused individual being banned for 2.90 fewer years, having probation for 4.99 fewer years, being imprisoned for 5.81 fewer years and 75% less likely to receive both prison time and an officer ban.”

If the executive gives directly, the punishment is also going to be lighter, according to the calculations of Fulmer and Knill. The ban from being an officer will be 3.64 years less, probation will be 1.59 years less, prison time will be 4.11 years less, and the probability of both prison and a fine will be 56% less.

CEOs who contribute the largest amounts of money get off even lighter.

Both papers offer striking findings, though it’s hard to pinpoint whether it’s the lobbying and contributions that are affecting regulatory enforcement, or whether companies and executives who are politically active also tend to be companies and executives who are the most sophisticated in dealing with government generally.

There’s certainly more research to be done in looking at how these companies' lobbying and contribution activity changes around the time they commit fraud. For example, do they start lobbying on SEC issues? Do they start giving more to members on committees who have budgetary authority over the SEC?

Still, the correlations are strong enough to be troubling. They highlight yet another reason why we ought be concerned about the role of money in politics.