The concept of deterrence

The Concept Of Deterrence Is Fundamental To The Success Of A System Of Regulatory Sanctions, But Ensuring Optimal Deterrence Is Very Difficult.

The aim of this essay is to firstly analyse the concept of deterrence from an economic perspective. Consideration will then be given to whether the deterrence approach will always lead to success by examining some of the penalties imposed for cartel offences and whether these penalties were always be reasonable. In order to prevent trivial fines and to ensure optimal deterrence, consideration will be given to whether imposing a penalty according to the actor's entire wealth will be reasonable. Reasons will then be considered of why imposing a high fine will not ensure optimal deterrence, for example reasons such as bankruptcy. Ways to make the deterrent approach more effective will be explored for example by making the ring leader of the offence pay a higher fine and the possible implications this has in relation to the concept of proportional justice. The approach of publishing offences will also be considered and whether it helps to make the deterrent approach effective. The final sections will examine the effects of having a fixed penalty for all offences and the possible problems and also the ways to make sanctions optimal in relation to experienced actors.

The deterrence approach looks to punishment techniques to prevent criminal behaviour. The economic version of the deterrence approach to punishment regards law breaking as an item that can be purchased by requiring the offender to pay a penalty for breaking the law. This approach is based upon the thinking that individuals and firms are rational actors who look out for their self interest's by ensuring that the estimated benefits will outweigh the costs in participating in the unlawful conduct. They will therefore see whether it will be worthwhile to break the law and gain the advantage of extra profits. If the offenders are detected and punished with sufficient severity, this should then prevent the offender and also future offenders from violating the law. Optimal deterrence on the other hand, requires the penalty for violating the law should be set should so that it equal's the total cost of violation and enforcement costs divided by the probability of detection and proof of the violation.

The first issue to consider is whether the deterrence approach will necessarily ensure compliance within a regulatory system. The examples which will be considered shortly relate to cartel offences. Cartel offences were introduced to prevent individuals from engaging in activities such as price fixing and market sharing. Therefore it is necessary to consider whether penalties imposed for cartels have been effective. The Office of Fair Trading imposed a penalty of £3.2 million against Napp Pharmaceuticals when their profits were estimated at £50 million. This type of punishment can be hardly called effective in preventing the offence from being committed again. Another example of fines being imposed which were not effective was shown by Christine Parker in her study of cartel offences in Australia. In relation to certain fire companies, who had agreed on market shares among members, the total penalty imposed was $15 million when the estimated gains were in the region of $750 million. This type of punishment falls under the “deterrence trap” as the penalties imposed will not be big enough to prevent the behaviour from occurring again and therefore ineffective. Therefore the next issue to consider is ways to achieve optimal deterrence.

A possible solution in order to avoid trivial fines being imposed on companies is to follow the solution presented by Nuno Garoupa. Garoupa argued that the penalty that was to be imposed should be set to the offender's entire wealth and this was to be complemented with appropriate probability of detection in order to achieve optimal deterrence. Nuno explained that if the wealth went up then so did the sanction. This would provide optimal deterrence as the sanctions are being increased while the probability of detection is reduced. This approach seems particularly valuable as the penalty imposed will actually affect the company and prevent profits being made as the penalty will always match the offender's wealth. In relation to cartels it seems reasonable to raise a higher penalty according to the offenders' wealth because it will further add to the deterrent effect as members will find it difficult to allocate the high fines and any gains made between the members in such a way which make their involvement and hard work in running the cartels beneficial. However Wouter Wills argues that this strategy of high fines means that punishment may not be optimal because it may exceed the company's ability to pay. He argued that reasons why a company may not be able to pay may be because the profits will not have been reserved but rather spent out on wages, salaries and tax. It therefore seems the burden of high penalties could only be imposed on those companies with significant assets as they will more likely have the means to pay and were more likely have had the power to control the illegal conduct.

Deterrence can be successful if high fines are imposed on individuals who were the core actors in the illegal conduct. In relation to cartels, Wils argued that this would make the functioning and setting up of cartels much more difficult because of the fear of the higher fine being imposed on the ring leader. An example of such an approach was show by the European Commission where a fine for a firm had been increased by 50% because it had been the ring leader. However it seems the leniency program may prevent a high fine being imposed on the ring leader. The leniency program provides immunity from fines for the person who reveals information about the illegal conduct to the Commission. However it seems that optimal deterrence cannot be achieved in relation to leniency programs as firstly no penalty are imposed in some situations and even if a penalty is imposed it could be greatly reduced and therefore may not equal any profits that have been made and are hidden. Nevertheless Giancarlo Spagnolo argues the leniency programs may have a deterrent effect because it will make illegal agreements more risky as there would always be the fear that if trust breaks down between the members then someone may reveal information of their illegal conduct. Hinloopen also takes the view that under the leniency programme, deterrence would increase because of the generosity of the fine discount and with the higher probability of detection in the future.

However, discounts in fines are not always the real reasons for giving information but for reasons such as cartel failure or where an investigation has been opened in the law breakers industry. Therefore deterrence would decrease as the company simply reveals information and gets a discount before any investigation is opened. They would then try their illegal conduct in a different manner or in another industry not under investigation. It should therefore not be possible for ringleaders to obtain a fine reduction through the leniency program as this would act as a greater deterrent in sending a moral message to those who are law abiding of the consequences. However Spagnolo leniency programs have a greater deterrent effect is because they would cause great distrust among members if it was the ring leader who provided information. In spite of this it seems that if the ringleader is a company with great assets and it is the one that gives the leniency notice then this would prevent a very high fine being imposed. Therefore it would seem better for the authority to conduct their own investigations so that the expected fine imposed upon the ring leader will be optimal.

High penalties with a low probability of detection would also seem to go against the concept of proportional justice. The principle of proportionality of penalties is stated within Article 49(3) of the Charter of the Fundamental Rights of the European Union which states, “The severity of the penalty must not be disproportionate to the criminal offence”. Wils argued that retributive view of punishment is more concerned with the fact that a person who does a wrong should only suffer to the proportion of his wrongdoing. Punishment here will not be concerned with deterring harmful conduct in the future. Wils argued that the “the retributive view imposes a constraint on the pursuit of optimal deterrence in the form of the principle of proportionality of penalties”. Steven Showell also argues that if the sanctions are to be smaller in order to achieve retributive punishment, achieving more deterrence would require investing in more resources in enforcement to catch violators of law. The proportionality of penalties approach seems to prevent effective punishment being imposed and also seems to add unnecessary costs. However it would seem that the proportional justice approach should only be used where there is full compliance by the company as this would reduce cost for the investigatory body and therefore they the saved money for future investigations. Otherwise it seems that the proportional justice is too soft and does nothing in ensuring optimal deterrence.

For deterrence to work the expected fine must exceed the expected gain. There is a requirement for the company planning the violation to estimate the gain and the probability that they will be detected and punished from all existing evidence. Therefore by having greater publicity of the fines imposed will add a greater effect on deterrence as it helps create a credible threat of punishment. Isabella Atanasiu argued that merely publishing the cartel offence will not have a strong effect on deterrence. However Kagan and Thornton found that just from hearing about sanctions being imposed on other firms had a direct impact to strengthen and improve the firm's own compliance program. It would therefore seem that publicity itself has a strong effect in raising awareness of the possible sanctions that can be imposed for certain offences. However to make the publicity message even stronger it would seem that if a prison sentence is linked then this will make those planning to commit crimes more aware of the consequences. However Ombri Ben-Shahar argues that even if the high sanction receives greater publicity, they still maybe undesirable. This is because high publicity may cause individuals to over-estimate the probability of detection and excessive deterrence would result. However it still seems publishing a strong sanction will achieve greater deterrence for future offenders. Further, despite the publicity issues, according to Wils it still seems that achieving complete deterrence will be impossible. This is because, despite successful prosecutions and the high fines being published, overtime these events will fade from the memory and violations will be committed by new groups. His reasoning seems realistic as overtime the memory tends to fade past events.

The next approach to consider is the effects of having a fixed penalty for all violations. This approach would make smaller companies wishing to engage in cartels aware of the risks they would face if they got caught. However Evgenia Motchenkova found that where the penalty is fixed it can ensure optimal deterrence but only at the price of shutting down the firm. She argues that complete deterrence is not possible because the fixed penalty would be too high for some and it would therefore lead to immediate bankruptcy. It would further seem that if all the weak companies were removed through bankruptcy the market would be dominated only by the stronger companies. Motchenkova therefore argued that the result could be improved by relating the penalty to the illegal gains. This would ensure complete deterrence even in cases where the penalties were moderate. However it could also be argued that the fixed penalty approach would go against the equal treatment requirement of the EC Court of Justice and Court of First Instance. The European Commission clarified that when imposing fines it “is not entitled to disregard the principle of equal treatment, a general principle of community law which is infringed where comparable situation are treated differently or different situations are treated in the same way, unless such difference is objectively justified”. This would be because although some comparable situations would result in the same fines being imposed, many different situations would arise needing a greater or a lower fine rather than a fixed penalty. The fixed penalty approach would also attract companies with great assets to engage in unlawful conduct and acquire huge profits and pay a small fine.

The final issue to consider is how optimal deterrence is to be achieved in relation to experienced actors. Kaplow and Bebchuk explained that in relation to those actors who are difficult to apprehend because of their expertise in the crime, it will be optimal to apply the maximal fine whereas for individuals who are easy to apprehend it will be optimal to apply lower fines to avoid over deterrence. It seems there analysis is particularly useful as the investigatory body may not have the complete knowledge of how difficult it will be to catch an actor. They further argued that if it can be decided only after the apprehension that the act was planned, higher sanctions will be appropriate because these types of actors are more likely to have destroyed or hide evidence and also additional penalties should be added. Although optimal deterrence cannot be achieved here because the estimated gain will not be known because evidence has been destroyed, deterrence may still result. This is because the higher sanction plus additional penalties added would result in a fine that may exceed any gains made. However under deterrence may result if the higher sanction plus additional penalties would result in gains which exceed the fine.

In conclusion, it seems that for companies who have made big gains from their illegal conduct the approach presented by Nuno should be used. The penalty should be set to the offender's entire wealth and when the wealth goes up so does the penalty. However the high penalty approach could force the company into bankruptcy. It seems reasonable to impose high fines on those actors who were the ring leaders in the unlawful conduct to make the deterrent approach more effective and not allow them to enter into leniency programmes to ensure that the optimal fine can be imposed. However by restricting ring leaders from entering into leniency programmes would make it much more difficult for the investigatory body to ever find out about their conduct. It would also seem that optimal fines with a lower rate of detection would go against the concept of proportional justice as it requires that a person should only punished to the extent of their wrong doing. However this principle seems too soft for criminals and prevents the optimal approach being used to the fullest. The publishing element seems valuable to the deterrent approach as it can make other companies aware of the consequences for engaging in illegal conduct. Finally having a fixed penalty approach cannot be accepted as it would ensure optimal deterrence at the price of bankruptcy. However by relating the penalty to the illegal gain would result in complete deterrence.