Modern criminology generally prefers to classify the type of crime and the topic:
By the type of offense, e.g., property crime, economic crime, and other corporate crimes like environmental
and health and safety law violations. Some crime is only possible
because of the identity of the offender, e.g., transnational money
laundering requires the participation of senior officers employed in
banks. But the FBI
has adopted the narrow approach, defining white-collar crime as "those
illegal acts which are characterized by deceit, concealment, or
violation of trust and which are not dependent upon the application or
threat of physical force or violence" (1989, 3). While the true extent
and cost of white-collar crime are unknown, the FBI and the Association of Certified Fraud Examiners estimate the annual cost to the United States to fall between $300 and $660 billion.
By the type of offender, e.g., by social class or high socioeconomic
status, the occupation of positions of trust or profession, or academic
qualification, researching the motivations for criminal behavior, e.g.,
greed or fear of loss of face if economic difficulties become obvious. Shover and Wright point to the essential neutrality of a crime as enacted in a statute.
It almost inevitably describes conduct in the abstract, not by
reference to the character of the persons performing it. Thus, the only
way that one crime differs from another is in the backgrounds and
characteristics of its perpetrators.
By organizational culture rather than the offender or offense which overlaps with organized crime. Appelbaum and Chambliss offer a twofold definition:
Occupational crime which occurs when crimes are committed to
promote personal interests, say, by altering records and overcharging,
or by the cheating of clients by professionals.
Organizational or corporate crime which occurs when corporate
executives commit criminal acts to benefit their company by overcharging
or price fixing, false advertising, etc.
The types of crime committed are a function of what is available to
the potential offender. Thus, those employed in relatively unskilled
environments have fewer opportunities to exploit than those who work in
situations where large financial transactions occur. Blue-collar crime tends to be more obvious and thus attracts more active police attention such as vandalism or shoplifting.
In contrast, white-collar employees can incorporate legitimate and
criminal behavior, thus making themselves less obvious when committing
the crime. Therefore, blue-collar crime will more often use physical
force, whereas in the corporate world, the identification of a victim is
less obvious and the issue of reporting is complicated by a culture of
commercial confidentiality to protect shareholder value. It is estimated that a great deal of white-collar crime is undetected or, if detected, it is not reported.
Corporate crime benefits the corporation (company or other type of
business organization), rather than individuals. It may, however, result
from decisions of high-ranking individuals within the corporation. Corporations are not, unlike individuals, litigated in criminal courts, which means the term "crime" does not really apply.
Litigation usually takes place in civil courts or by institutions with
jurisdiction over specific types of offences, such as the U.S. Securities and Exchange Commission that litigates violations of financial market and investment statutes.
State-corporate crime is “illegal or socially injurious actions that
occur when one or more institutions or political governance pursue a
goal in direct cooperation with one or more institutions of economic
production and distribution.” The
negotiation of agreements between a state and a corporation will be at a
relatively senior level on both sides, this is almost exclusively a
white-collar "situation" which offers the opportunity for crime.
Although law enforcement claims to have prioritized white-collar crime, evidence shows that it continues to be a low priority.
When senior levels of a corporation engage in criminal activity using the company this is sometimes called control fraud.
Organized transnational crime
Organized transnational crime
is organized criminal activity that takes place across national
jurisdictions, and with advances in transportation and information
technology, law enforcement officials and policymakers have needed to
respond to this form of crime on a global scale. Some examples include human trafficking, money laundering, drug smuggling, illegal arms dealing, terrorism, and cybercrime. Although it is impossible to precisely gauge transnational crime, the Millennium Project, an international think tank, assembled statistics on several aspects of transnational crime in 2009:
World illicit trade of almost $780 billion
Counterfeiting and piracy of $300 billion to $1 trillion
Global drug trade of $321 billion
Red Collar Crime
When
a white collar criminal turns violent, it becomes red collar crime.
This can take the form of killing a witness in a fraud trial to silence
them, or murdering someone who exposed the fraud. Such as a journalist,
detective or whistleblower, for example. Perri and Lichtenwald defined
Red Collar Crime as:
“This sub-group is referred to as red-collar criminals because
they straddle both the white-collar crime arena and, eventually, the
violent crime arena. In circumstances where there is threat of
detection, red-collar criminals commit brutal acts of violence to
silence the people who have detected their fraud and to prevent further
disclosure.”
According to a 2018 report by the Bureau of Labour Statistics, Homicide is the third highest cause of death in the American workplace.
The Atlantic magazine reported that red collar criminals often have
traits of narcissism and psychopathy, which ironically, are seen as
desirable qualities in the recruitment process. Even though it puts a
company at risk of employing a white collar criminal.
One investigator, Richard G. Brody, said that the murders might be difficult to detect, being mistaken for accidents or suicides:
“Whenever I read about high-profile executives who are found
dead, I immediately think red-collar crime,” he said. “Lots of people
are getting away with murder.”
Occupational crime
Occupational
crime is “any act punishable by law that is committed through
opportunity created on the course of an occupation that is legal.” Individuals may commit crime during employment or unemployment. The two most common forms are theft and fraud. Theft can be of varying degrees, from a pencil to furnishings to a car. Insider trading, the trading of stock by someone with access to publicly unavailable information, is a type of fraud.
Crimes related to national interests
The
crimes related to the national interests consist mainly of treason. In
the modern world, there are a lot of nations which divide the crimes
into some laws. "Crimes Related to Inducement of Foreign Aggression" is
the crime of communicating with aliens
secretly to cause foreign aggression or menace. "Crimes Related to
Foreign Aggression" is the treason of co-operating with foreign
aggression positively regardless of the national inside and outside.
"Crimes Related to Insurrection" is the internal treason. Depending on a
country, criminal conspiracy is added to these. One example is Jho Low, a mega thief and traitor who stole billions in USA currency from a Malaysian government fund and is now on a run as a fugitive.
Demographics
According to a 2016 American study,
A
considerable percentage of white-collar offenders are gainfully
employed middle-aged Caucasian men who usually commit their first
whitecollar offense sometime between their late thirties through their
mid-forties and appear to have middle-class backgrounds. Most have some
higher education, are married, and have moderate to strong ties to
community, family, and religious organizations. Whitecollar offenders
usually have a criminal history, including infractions that span the
spectrum of illegality, but many do not overindulge in vice. Recent
research examining the five-factor personality trait model determined
that white-collar offenders tend to be more neurotic and less agreeable
and conscientious than their non-criminal counterparts.
Punishment
In the United States, sentences for white-collar crimes may include a combination of imprisonment, fines, restitution, community service, disgorgement, probation, or other alternative punishment. These punishments grew harsher after the Jeffrey Skilling and Enron scandal, when the Sarbanes–Oxley Act of 2002 was passed by the United States Congress and signed into law by President George W. Bush, defining new crimes and increasing the penalties for crimes such as mail and wire fraud.
Sometimes punishment for these crimes could be hard to determine due to
the fact that convincing the courts that what the offender has done is
challenging within itself. In other countries, such as China, white-collar criminals can be given the death penalty under aggravating circumstances, yet some countries have a maximum of 10–25 years imprisonment. Certain countries like Canada
consider the relationship between the parties to be a significant
feature on sentence when there is a breach of trust component involved. Questions about sentencing disparity in white-collar crime continue to be debated. The FBI,
concerned with identifying this type of offense, collects statistical
information on several different fraud offenses (swindles and cons,
credit card or ATM fraud, impersonation, welfare fraud, and wire fraud),
bribery, counterfeiting and forgery, and embezzlement.
In the United States, the longest sentences for white-collar crimes have been for the following: Sholam Weiss (845 years for racketeering, wire fraud and money laundering in connection with the collapse of National Heritage Life Insurance Company); Norman Schmidt and Charles Lewis (330 years and 30 years, respectively, for "high-yield investment" scheme); Bernard Madoff (150 years for $65 billion fraud scheme); Frederick Brandau (55 years for $117 million Ponzi scheme); Eduardo Masferrer (30 years for accounting fraud); Chalana McFarland (30 years for mortgage fraud scheme); Lance Poulsen (30 years for $2.9 billion fraud).
Theories
From the perspective of an offender, the easiest targets to entrap in "white collar" crime are those with certain degree of vulnerability or those with symbolic or emotional value to the offender.
Examples of these people can be family members, clients, and close
friends who are wrapped up in personal or business proceedings with the
offender. The way that most criminal operations are conducted is through
a series of different particular techniques. In this case, a technique
is a certain way to complete a desired task. When one is committing a
crime, whether it be shoplifting or tax fraud, it is always easier to
successfully pull off the task with experience in the technique.
Shoplifters who are experienced at stealing in plain sight are much more
successful than those who do not know how to steal. The major
difference between a shoplifter and someone committing a white collar
crime is that the techniques used are not physical but instead consist
of acts like talking on the phone, writing, and entering data.
Often these criminals utilize the "blame game theory", a theory
in which certain strategies are utilized by an organization or business
and its members in order to strategically shift blame by pushing
responsibility to others or denying misconduct.
This theory is particularly used in terms of organizations and
indicates that offenders often do not take blame for their actions. Many
members of organizations will try to absolve themselves of
responsibility when things go wrong.
Forbes Magazine lays out four theories for what leads a criminal to commit a "white collar" crime.
The first is that there are poorly designed job incentives for the
criminal. Most finance professionals are given a certain type of
compensation or reward for short-term mass profits. If a company
incentivizes an employee to help commit a crime, such as assisting in a
Ponzi Scheme, many employees will partake in order to receive the reward
or compensation. Often, this compensation is given in the form of a
cash "bonus" on top of their salaries. By doing a task in order to
receive a reward, many employees feel as though they are not responsible
for the crime, as they have not ordered it. The "blame game theory"
comes into play as those being asked to carry out the illegal activities
feel as though they can place the blame on their bosses instead of
themselves. The second theory is that the company's management is very
relaxed when it comes to enforcing ethics. If unethical practices are
already a commonplace in the business, employees will see that as a
"green light" to conduct unethical and unlawful business practices to
further the business. This idea also ties into Forbes' third theory,
that most stock traders see unethical practices as harmless. Many see
white collar crime as a victimless crime, which is not necessarily true.
Since many of these stock traders cannot see the victims of their
crimes, it seems as if it hurts no one. The last theory is that many
firms have unrealistic, large goals. They preach the mentality that
employees should "do what it takes".
A Ponzi scheme (/ˈpɒnzi/, Italian:[ˈpontsi]) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. Named after Italian businessman Charles Ponzi,
this scheme misleads investors by either falsely suggesting that
profits are derived from legitimate business activities (whereas the
business activities are non-existent), or by exaggerating the extent and
profitability of the legitimate business activities, leveraging new
investments to fabricate or supplement these profits. A Ponzi scheme can
maintain the illusion of a sustainable business as long as investors
continue to contribute new funds, and as long as most of the investors
do not demand full repayment or lose faith in the non-existent assets
they are purported to own.
Some of the first recorded incidents to meet the modern definition of the Ponzi scheme were carried out from 1869 to 1872 by Adele Spitzeder in Germany and by Sarah Howe in the United States in the 1880s through the "Ladies' Deposit". Howe offered a solely female clientele an 8% monthly interest rate and then stole the money that the women had invested. She was eventually discovered and served three years in prison. The Ponzi scheme was also previously described in novels; Charles Dickens's 1844 novel Martin Chuzzlewit and his 1857 novel Little Dorrit both feature such a scheme.
In the 1920s, Charles Ponzi carried out this scheme and became well known throughout the United States because of the huge amount of money that he took in. His original scheme was based on the legitimate arbitrage of international reply coupons for postage stamps, but he soon began diverting new investors' money to make payments to earlier investors and to himself.
Unlike earlier similar schemes, Ponzi's gained considerable press
coverage both within the United States and internationally both while it
was being perpetrated and after it collapsed – this notoriety
eventually led to the type of scheme being named after him.
Characteristics
In a Ponzi scheme, a con artist offers investments
that promise very high returns with little or no risk to their victims.
The returns are said to originate from a business or a secret idea run
by the con artist. In reality, the business does not exist or the idea
does not work in the way it is described. The con artist pays the high
returns promised to their earlier investors by using the money obtained
from later investors. Instead of engaging in a legitimate business
activity, the con artist attempts to attract new investors to make the
payments that were promised to earlier investors. The operator of the scheme also diverts clients' funds for the operator's personal use.
With little or no legitimate earnings, Ponzi schemes require a
constant flow of new money to survive. When it becomes hard to recruit
new investors, or when large numbers of existing investors cash out,
these schemes collapse. As a result, most investors end up losing all or much of the money they invested. In some cases, the operator of the scheme may simply disappear with the money.
High investment returns with little or no risk.Every investment carries some degree of risk,
and investments yielding higher returns typically involve more risk.
Any "guaranteed" investment opportunity should be considered suspect.
Overly consistent returns.
Investment values tend to go up and down over time, especially those
offering potentially high returns. An investment that continues to
generate regular positive returns regardless of overall market
conditions is considered suspicious.
Unregistered investments. Ponzi schemes typically involve investments that have not been registered with financial regulators (like the SEC or the FCA).
Registration is important because it provides investors with access to
key information about the company's management, products, services, and
finances.
Unlicensed sellers. In the United States,
federal and state securities laws require that investment professionals
and their firms be licensed or registered. Most Ponzi schemes involve
unlicensed individuals or unregistered firms.
Secretive or complex strategies. Investments that cannot be understood or on which no complete information can be found or obtained are considered suspicious.
Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
Difficulty receiving payments. Investors should be suspicious
of cases where they don't receive a payment or have difficulty cashing
out. Ponzi scheme promoters sometimes try to prevent participants from
cashing out by offering even higher returns for staying put.
According to criminologist Marie Springer, the following red flags can also be of relevance:
The sales personnel or adviser are overly pushy or aggressive (may involve high-pressure sales).
The client cannot determine the actual trades or investments that have been carried out.
The clients are asked to write checks with a different name than the
name of the corporation (such as an individual) or to send checks to a
different address than the corporate address.
Once the maturity date of their investment arrives, clients are pressured to roll over the principal and the profits.
Methods
Typically, Ponzi schemes require an initial investment and promise above-average returns. They use vague verbal guises such as "hedgefutures trading", "high-yield investment programs", or "offshore investment"
to describe their income strategy. It is common for the operator to
take advantage of a lack of investor knowledge or competence, or
sometimes claim to use a proprietary, secret investment strategy to
avoid giving information about the scheme.
Charles Ponzi
The basic premise of a Ponzi scheme is "to rob Peter to pay Paul".
Initially, the operator pays high returns to attract investors and
entice current investors to invest more money. When other investors
begin to participate, a cascade effect begins. The schemer pays a
"return" to initial investors from the investments of new participants,
rather than from genuine profits.
Often, high returns encourage investors to leave their money in
the scheme, so that the operator does not actually have to pay very much
to investors. The operator simply sends statements showing how much
they have earned, which maintains the deception that the scheme is an
investment with high returns. Investors within a Ponzi scheme may face
difficulties when trying to get their money out of the investment.
Operators also try to minimize withdrawals by offering new plans
to investors where money cannot be withdrawn for a certain period of
time in exchange for higher returns. The operator sees new cash flows as
investors cannot transfer money. If a few investors do wish to withdraw
their money in accordance with the terms allowed, their requests are
usually promptly processed, which gives the illusion to all other
investors that the fund is solvent and financially sound.
Ponzi schemes sometimes begin as legitimate investment vehicles, such as hedge funds
that can easily degenerate into a Ponzi-type scheme if they
unexpectedly lose money or fail to legitimately earn the returns
expected. The operators fabricate false returns or produce fraudulent
audit reports instead of admitting their failure to meet expectations,
from which point on the operation can be considered a Ponzi scheme.
A wide variety of investment vehicles and strategies, typically
legitimate, have become the basis of Ponzi schemes. For instance, Allen Stanford used bank certificates of deposit
to defraud tens of thousands of people. Certificates of deposit are
usually low-risk and insured instruments, but the Stanford certificates
of deposit were fraudulent.
Unraveling
Theoretically,
it is possible for certain Ponzi schemes to ultimately "succeed"
financially, at least so long as a Ponzi scheme was not what the
promoters were initially intending to operate. For example, a failing
hedge fund reporting fraudulent returns could conceivably "make good"
its reported numbers, for example by making a successful high-risk
investment. Moreover, if the operators of such a scheme are facing the
likelihood of imminent collapse accompanied by criminal charges, they
may see little additional "risk" to themselves in attempting to cover
their tracks by engaging in further illegal acts to try and make good
the shortfall (for example, by engaging in insider trading).
Especially with investment vehicles like hedge funds that are regulated
and monitored less heavily than other investment vehicles such as
mutual funds, in the absence of a whistleblower
or accompanying illegal acts, any fraudulent content in reports is
often difficult to detect unless and until the investment vehicles
ultimately collapse.
Typically, however, if a Ponzi scheme is not stopped by
authorities it usually falls apart for one or more of the following
reasons:
The operator vanishes, taking all the remaining investment
money. Promoters who intend to abscond often attempt to do so as returns
due to be paid are about to exceed new investments, as this is when the
investment capital available will be at its maximum.
Since the scheme requires a continual stream of investments to fund
higher returns, if the number of new investors slows down, the scheme
collapses as the operator can no longer pay the promised returns (the
higher the returns, the greater the risk of the Ponzi scheme
collapsing). Such liquidity crises often trigger panics, as more people start asking for their money, similar to a bank run.
External market forces, such as a sharp decline in the economy, can
often hasten the collapse of a Ponzi scheme (for example, the Madoff investment scandal during the market downturn of 2008), since they often cause many investors to attempt to withdraw part or all of their funds sooner than they had intended.
In some cases, two or more of the aforementioned factors may be at
play. For example, news of a police investigation into a Ponzi scheme
may cause investors to immediately demand their money, and in turn cause
the promoters to flee the jurisdiction sooner than planned (assuming
they intended to eventually abscond in the first place), thus causing
the scheme to collapse much faster than if the police investigation had
simply been permitted to run its course.
Actual losses are extremely difficult to calculate. The amounts
that investors thought they had were never attainable in the first
place. The wide gap between "money in" and "fictitious gains" make it
virtually impossible to know how much was lost in any Ponzi scheme.
Similar schemes
Pyramid scheme
A pyramid scheme
is a form of fraud similar in some ways to a Ponzi scheme, relying as
it does on a mistaken belief in a nonexistent financial reality,
including the hope of an extremely high rate of return. However, several
characteristics distinguish these schemes from Ponzi schemes:
In a Ponzi scheme, the schemer acts as a "hub" for the victims,
interacting with all of them directly. In a pyramid scheme, those who
recruit additional participants benefit directly. Failure to recruit
typically means no investment return.
A Ponzi scheme claims to rely on some esoteric investment approach,
and often attracts well-to-do investors, whereas pyramid schemes
explicitly claim that new money will be the source of payout for the
initial investments.
A pyramid scheme typically collapses much faster because it requires
exponential increases in participants to sustain it. By contrast, Ponzi
schemes can survive (at least in the short-term) simply by persuading
most existing participants to reinvest their money, with a relatively
small number of new participants.
Cryptocurrency Ponzi
Cryptocurrencies have been employed by scammers attempting a new generation of Ponzi schemes. For example, misuse of initial coin offerings, or "ICOs", has been one such method, known as "smart Ponzis" per the Financial Times. Most schemes have a low recovery rate with investors losing their funds permanently.
The novelty of ICOs means that there is currently a lack of
regulatory clarity on the classification of these financial devices,
allowing scammers wide leeway to develop Ponzi schemes using these
pseudo-assets.
Also, the pseudonymity of cryptocurrency transactions and their
international nature involving countless jurisdictions in many different
countries can make it much more difficult to identify and take legal
action (whether civil or criminal) against perpetrators.
The May 2022 collapse of TerraUSD, a stablecoin propped up by a complex algorithmic mechanism offering 20% yields, was described as "Ponzinomics" by Wired. Another example of a well known ponzi scheme involving cryptoassets was the ICO of AriseBank or AriseCoin, involving claims about founding the world's first "decentralized bank". The SEC successfully recovered the funds stolen in the ICO. A similar scheme was perpetrated by the founders of the fraudulent cryptocurrency Bitconnect.
In September 2022, Jamie Dimon, CEO of JPMorgan, described cryptocurrencies as "Decentralised Ponzi Schemes".
Economic bubble
Economic bubbles
are also similar to a Ponzi scheme in that one participant gets paid by
contributions from a subsequent participant until inevitable collapse. A
bubble involves ever-rising prices in an open market (for example stock, housing, cryptocurrency, tulip bulbs, or the Mississippi Company)
where prices rise because buyers bid more, and buyers bid more because
prices are rising. Bubbles are often said to be based on the "greater fool" theory. As with the Ponzi scheme, the price exceeds the intrinsic value of the item, but unlike the Ponzi scheme:
In most economic bubbles, there is no single person or group misrepresenting the intrinsic value. A common exception is a pump and dump
scheme (typically involving buyers and holders of thinly-traded
stocks), which has much more in common with a Ponzi scheme compared to
other types of bubbles.
Ponzi schemes typically result in criminal charges when authorities
discover them, but other than pump and dump schemes, economic bubbles do
not typically involve unlawful activity, or even bad faith
on the part of any participant. Laws are only broken if someone
perpetuates the bubble by knowingly and deliberately misrepresenting
facts to inflate the value of an item (as with a pump and dump scheme).
Even when this occurs, wrongdoing (and especially criminal activity) is
often much more difficult to prove in court compared to a Ponzi scheme.
Therefore, the collapse of an economic bubble rarely results in criminal
charges (which require proof beyond a reasonable doubt
to secure a conviction) and, even when charges are pursued, they are
often against corporations, which can be easier to pursue in court
compared to charges against people but also can only result in fines as
opposed to jail time. The more commonly-pursued legal recourse in
situations where someone suspects an economic bubble is the result of
nefarious activity is to sue for damages in civil court, where the standard of proof is only balance of probabilities and where the plaintiff need not demonstrate mens rea.
In some jurisdictions,
following the collapse of a Ponzi scheme, even the "innocent"
beneficiaries are liable to repay any gains for distribution to the
victims. In this context, "innocent" beneficiaries can include anyone
who unwittingly profited without being aware of the fraudulent nature of
the scheme, and even charities to which perpetrators often give to
relatively generously while a scheme is in operation in an effort to
enhance their own profile and thereby "profit" from the resulting
positive media coverage. This typically does not happen in the case of
an economic bubble, especially if nobody can prove the bubble was caused
by anyone acting in bad faith, moreover a person whose own
participation in an economic bubble is not particularly notable is not
likely to enhance participation in the bubble and thus personally profit
by donating to charity.
Items traded in an economic bubble are much more likely to have an
intrinsic value that is worth a substantial proportion of the market
price. Therefore, following collapse of an economic bubble (especially
one in a commodity such as real estate) the items affected will often
retain some value, whereas an investment that is part of a Ponzi scheme
will typically be worthless (or very close to worthless). On the other
hand, it is much easier to obtain financing for many items that are the
frequent subject of bubbles. If an investor trading on margin
or borrowing to finance investments becomes the victim of a bubble, he
or she can still lose all (or a very substantial portion) of his or her
investment capital, or even be liable for losses in excess of the
original capital investment.
Exit scam
A Ponzi scheme which ultimately terminates with the operator absconding is similar to an exit scam.
The main difference is that an exit scam does not involve any sort of
investment vehicle with the accompanying promised returns. Instead, exit
scammers either accept payment for product which they never ship
(usually after gaining a reputation for reliably shipping product) or
steal funds held in escrow on behalf of third parties (the latter often involves the operators of illegal darknet markets that facilitate the sale of illicit goods and services).
Related concepts
Ponzi finance
The term "ponzi finance" generally designates non-sustainable patterns of finance, such as borrowers who can only meet their debt
commitment if they continuously obtain new sources of financing, often
at an accelerating pace and/or ever-increasing interest rates until the
borrower cannot secure more financing at any interest rate and becomes
insolvent. The term was first coined by economist Hyman Minsky.
Ponzi game
In economics, the term "ponzi game" designates a hypothesis where a government continuously defers the repayment of its public debt
by issuing new debt: each time its existing debt arrives at maturity,
it borrows funds from new and/or existing lenders in order to repay its
existing debt.
As a result of deregulation, France Télécom (now Orange) operated phone booths in Wellington and across New Zealand in the 2000s
Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy.
It became common in advanced industrial economies in the 1970s and
1980s, as a result of new trends in economic thinking about the
inefficiencies of government regulation, and the risk that regulatory
agencies would be controlled by the regulated industry to its benefit,
and thereby hurt consumers and the wider economy. Economic regulations
were promoted during the Gilded Age, in which progressive reforms were claimed as necessary to limit externalities like corporate abuse, unsafe child labor, monopolization, pollution,
and to mitigate boom and bust cycles. Around the late 1970s, such
reforms were deemed burdensome on economic growth and many politicians
espousing neoliberalism started promoting deregulation.
The stated rationale for deregulation is often that fewer and
simpler regulations will lead to raised levels of competitiveness,
therefore higher productivity, more efficiency and lower prices overall. Opposition to deregulation may involve apprehension regarding environmental pollution and environmental quality standards (such as the removal of regulations on hazardous materials), financial uncertainty, and constraining monopolies.
Regulatory reform
is a parallel development alongside deregulation. Regulatory reform
refers to organized and ongoing programs to review regulations with a
view to minimizing, simplifying, and making them more cost effective.
Such efforts, given impetus by the Regulatory Flexibility Act of 1980, are embodied in the United States Office of Management and Budget's Office of Information and Regulatory Affairs, and the United Kingdom's Better Regulation Commission. Cost–benefit analysis
is frequently used in such reviews. In addition, there have been
regulatory innovations, usually suggested by economists, such as emissions trading.
Deregulation can be distinguished from privatization, which transfers state-owned businesses to the private sector.
Having announced a wide range of deregulatory policies, Labor Prime Minister Bob Hawke
announced the policy of "Minimum Effective Regulation" in 1986. This
introduced now-familiar requirements for "regulatory impact statements",
but compliance by governmental agencies took many years. The labor
market under the Hawke/Keating governments operated under the Prices and Incomes Accord. In the mid-90s John Howard's Liberal Party began deregulation of the labor market with the Workplace Relations Act 1996, going much further in 2005 through its WorkChoices policy. However, this was reversed under the following Rudd Labor government.
Brazil
After Dilma's impeachment, Michel Temer introduced a labor reform, besides allowing up to 100% of foreign capital on Brazilian air companies and giving more protection to state-owned enterprises from political pressure.
Bolsonaro administration also promoted deregulations (even the expression "Bolsonomics" was created), such as Economic Freedom Law, Natural Gas Law, Business Environment Law, Basic Sanitation Legal Framework, besides allowing the direct sale of ethanol by fuel stations and opening rail transport industry to private investment. and deregulating the use of foreign currency.
Natural gas is deregulated in most of the country, with the exception
of some Atlantic provinces and some pockets like Vancouver Island and
Medicine Hat. Most of this deregulation happened in the mid-1980s. Comparison shopping websites
operate in some of these jurisdictions, particularly Ontario, Alberta
and British Columbia. The other provinces are small markets and have not
attracted suppliers. Customers have the choice of purchasing from a
local distribution company (LDC) or a deregulated supplier. In most
provinces the LDC is not allowed to offer a term contract, just a
variable price based on the spot market. LDC prices are changed either
monthly or quarterly.
Ontario
began deregulation of electricity supply in 2002, but pulled back
temporarily due to voter and consumer backlash at the resulting price
volatility. The government is still searching for a stable working regulatory framework.
The current status is a partially regulated structure in which
consumers have received a capped price for a portion of the publicly
owned generation. The remainder has been at market price and there are
numerous competing energy contract providers. However, Ontario is
installing Smart Meters in all homes and small businesses and is
changing the pricing structure to Time of Use pricing. All small volume
consumers were scheduled to shift to the new rate structure by the end
of 2012.
Alberta
has deregulated its electricity provision. Customers are free to choose
which company they sign up with, but there are few companies to choose
from and the consumer price of electricity has increased substantially
as it has in all other Canadian provinces.. Consumers may choose to
remain with the public utility at the Regulated Rate Option.
European Union
In 2003, there were amendments to EU directive on software patents.
The taxi industry was deregulated in Ireland in 2000, and the price of a license dropped overnight to €5,000. The number of taxis increased dramatically.
However, some existing taxi drivers were unhappy with the change,
as they had invested up to €100,000 to purchase licenses from existing
holders, and regarded them as assets. In October 2013 they brought a
test case in the High Court for damages. Their claim was dismissed two years later.
New Zealand
Since
the deregulation of the postal sector, different postal operators can
install mail collection boxes in New Zealand's streets.
New Zealand Governments adopted policies of extensive deregulation from 1984 to 1995. Originally initiated by the Fourth Labour Government of New Zealand, the policies of deregulation were later continued by the Fourth National Government of New Zealand.
The policies had the goal of liberalizing the economy and were notable
for their very comprehensive coverage and innovations. Specific policies
included: floating the exchange rate; establishing an independent
reserve bank; performance contracts for senior civil servants; public
sector finance reform based on accrual accounting; tax neutrality;
subsidy-free agriculture; and industry-neutral competition regulation.
Economic growth was resumed in 1991. New Zealand was changed from a
somewhat closed and centrally controlled economy to one of the most open
economies in the OECD.
As a result, New Zealand, went from having a reputation as an almost
socialist country to being considered one of the most business-friendly
countries of the world, next to Singapore. However, critics charge that
the deregulation has brought little benefit to some sections of society,
and has caused much of New Zealand's economy (including almost all of
the banks) to become foreign-owned.
Russia
Russia went through wide-ranging deregulation (and concomitant privatization) efforts in the late 1990s under Boris Yeltsin, now partially reversed under Vladimir Putin. The main thrust of deregulation has been the electricity sector (see RAO UES), with railroads and communal utilities tied in second place. Deregulation of the natural gas sector (Gazprom) is one of the more frequent demands placed upon Russia by the United States and European Union.
From 1997 to 2010, the Labour governments of Tony Blair and Gordon Brown developed a programme called "better regulation".
This required government departments to review, simplify or abolish
existing regulations, and a "one in, one out" approach to new
regulations. In 1997, Chancellor Brown announced the "freeing" of the
Bank of England to set monetary policy, so the Bank was no longer under
direct government control. In 2006, new primary legislation (the Legislative and Regulatory Reform Act 2006) was introduced to establish statutory principles and a code of practice and it permits ministers to make Regulatory Reform Orders
(RROs) to deal with older laws which they deem to be out of date,
obscure or irrelevant. This act has often been criticized and was
described in Parliament by Lord (Patrick) Jenkin as the "Abolition of Parliament Act".
New Labour privatized only a few services, such as Qinetiq.
But a great deal of infrastructure and maintenance work previously
carried out by government departments was contracted out (outsourced) to
private enterprise under the public–private partnership,
with competitive bidding for contracts within a regulatory framework.
This included large projects such as building new hospitals for the NHS, building new state schools, and maintaining the London Underground. These were never privatized by public offer, but instead by tendering commercial interests.
United States
History of regulation
One problem that encouraged deregulation was the way in which regulated industries often come to control the government regulatory agencies in a process known as regulatory capture.
Industries then use regulation to serve their own interests, at the
expense of the consumer. A similar pattern has been seen with the
deregulation process itself, often effectively controlled by regulated
industries through lobbying. Such political forces, however, exist in
many other forms for other lobby groups.
Examples of deregulated industries in the United States are banking, telecommunications, airlines, and natural resources.
During the Progressive Era (1890s–1920), PresidentsTheodore Roosevelt, William Howard Taft, and Woodrow Wilson instituted regulation on parts of the American economy, most notably big business and industry. Some prominent reforms were trust-busting
(the destruction and banning of monopolies), the creation of laws
protecting the American consumer, the creation of a federal income tax
(by the Sixteenth Amendment; the income tax used a progressive tax structure with especially high taxes on the wealthy), the establishment of the Federal Reserve, the institution of shorter working hours, higher wages, better living conditions, better rights and privileges to trade unions, protection of the rights of strikers, banning of unfair labor practices, and the delivery of more social services to the working classes and social safety nets to many unemployed workers, thus helping to create a welfare state.
During the Presidencies of Warren Harding (1921–23) and Calvin Coolidge (1923–29), the federal government generally pursued laissez-faire economic policies. After the onset of the Great Depression, President Franklin D. Roosevelt implemented many economic regulations, including the National Industrial Recovery Act (which was struck down by the Supreme Court), regulation of trucking, airlines and communications, the Securities Exchange Act of 1934, and the Glass–Steagall Act of 1933. These regulations stayed largely in place until Richard Nixon's Administration.
In supporting his competition-limiting regulatory initiatives
President Roosevelt blamed the excesses of big business for causing an economic bubble.
However, historians lack consensus in describing the causal
relationship between various events and the role of government economic
policy in causing or ameliorating the Depression.
1970–2000
Deregulation gained momentum in the 1970s, influenced by research by the Chicago school of economics and the theories of George Stigler, Alfred E. Kahn, and others. The new ideas were widely embraced by both liberals and conservatives. Two leading think tanks in Washington, the Brookings Institution and the American Enterprise Institute,
were active in holding seminars and publishing studies advocating
deregulatory initiatives throughout the 1970s and 1980s. Cornell
economist Alfred E. Kahn played a central role in both theorizing and
participating in the Carter Administration's efforts to deregulate transportation.
Transportation
Nixon administration
The first comprehensive proposal to deregulate a major industry, transportation, originated in the Richard Nixon Administration and was forwarded to Congress in late 1971.
This proposal was initiated and developed by an interagency group that
included the Council of Economic Advisors (represented by Hendrik Houthakker and Thomas Gale Moore),
White House Office of Consumer Affairs (represented by Jack Pearce),
Department of Justice, Department of Transportation, Department of
Labor, and other agencies.
The proposal addressed both rail and truck transportation, but
not air carriage. (92d Congress, Senate Bill 2842) The developers of
this legislation in this Administration sought to cultivate support from
commercial buyers of transportation services, consumer organizations, economists, and environmental organization leaders.
This 'civil society' coalition became a template for coalitions
influential in efforts to deregulate trucking and air transport later in
the decade.
President Jimmy Carter – aided by economic adviser Alfred E. Kahn
– devoted substantial effort to transportation deregulation, and worked
with Congressional and civil society leaders to pass the Airline Deregulation Act on October 24, 1978 – the first federal government regulatory regime, since the 1930s, to be completely dismantled.
These
were the major deregulation acts in transportation that set the general
conceptual and legislative framework, which replaced the regulatory
systems put in place between the 1880s and the 1930s. The dominant
common theme of these Acts was to lessen barriers to entry
in transport markets and promote more independent, competitive pricing
among transport service providers, substituting the freed-up competitive
market forces for detailed regulatory control of entry, exit, and price
making in transport markets. Thus deregulation arose, though
regulations to promote competition were put in place.
Reagan administration
U.S. President Ronald Reagan campaigned on the promise of rolling back environmental regulations. His devotion to the economic beliefs of Milton Friedman led him to promote the deregulation of finance, agriculture, and transportation.
A series of substantial enactments were needed to work out the process
of encouraging competition in transportation. Interstate buses were
addressed in 1982, in the Bus Regulatory Reform Act of 1982. Freight forwarders (freight aggregators) got more freedoms in the Surface Freight Forwarder Deregulation Act of 1986.
As many states continued to regulate the operations of motor carriers
within their own state, the intrastate aspect of the trucking and bus
industries was addressed in the Federal Aviation Administration Authorization Act of 1994,
which provided that "a State, political subdivision of a State, or
political authority of two or more States may not enact or enforce a
law, regulation, or other provision having the force and effect of law
related to a price, route, or service of any motor carrier." 49 U.S.C.§ 14501(c)(1) (Supp. V 1999).
Ocean transportation was the last to be addressed. This was done in two acts, the Ocean Shipping Act of 1984 and the Ocean Shipping Reform Act of 1998.
These acts were less thoroughgoing than the legislation dealing with
U.S. domestic transportation, in that they left in place the
"conference" system in international ocean liner shipping, which
historically embodied cartel mechanisms. However, these acts permitted
independent rate-making by conference participants, and the 1998 Act
permitted secret contract rates, which tend to undercut collective
carrier pricing. According to the United States Federal Maritime Commission,
in an assessment in 2001, this appears to have opened up substantial
competitive activity in ocean shipping, with beneficial economic
results.
Energy
The Emergency Petroleum Allocation Act was a regulating law, consisting of a mix of regulations and deregulation, which passed in response to OPEC price hikes and domestic price controls which affected the 1973 oil crisis in the United States. After adoption of this federal legislation, numerous state legislation known as Natural Gas Choice
programs have sprung up in several states, as well as the District of
Columbia. Natural Gas Choice programs allow residential and small volume
natural gas users to compare purchases from natural gas suppliers with
traditional utility companies. There are currently hundreds of
federally unregulated natural gas suppliers operating in the US.
Regulation characteristics of Natural Gas Choice programs vary between
the laws of the currently adoptive 21 states (as of 2008).
Deregulation was put into effect in the communications industry by the government at the start of the Multi-Channel Transition era. This deregulation put into place a division of labor between the studios and the networks.
Communications in the United States (and internationally) are areas in
which both technology and regulatory policy have been in flux. The rapid
development of computer and communications technology – particularly
the Internet – have increased the size and variety of communications
offerings. Wireless, traditional landline telephone, and cable companies
increasingly invade each other's traditional markets and compete across
a broad spectrum of activities. The Federal Communications Commission
and Congress appear to be attempting to facilitate this evolution. In
mainstream economic thinking, development of this competition would
militate against detailed regulatory control of prices and service
offerings, and hence favor deregulation of prices and entry into
markets.
On the other hand, there exists substantial concern about concentration
of media ownership resulting from relaxation of historic controls on
media ownership designed to safeguard diversity of viewpoint and open
discussion in the society, and about what some perceive as high prices
in cable company offerings at this point.
Finance
The financial sector in the U.S. has been considerably deregulated in recent decades, which has allowed for greater financial risktaking. The financial sector used its considerable political sway in Congress
and in the political establishment and influenced the ideology of
political institutions to press for more and more deregulation. Among the most important of the regulatory changes was the Depository Institutions Deregulation and Monetary Control Act of 1980, which repealed the parts of the Glass–Steagall Act regarding interest rate regulation via retail banking. The Financial Services Modernization Act
of 1999 repealed part of the Glass–Steagall Act of 1933, removing
barriers in the market that prohibited any one institution from acting
as any combination of an investment bank, a commercial bank, and an
insurance company.
Such deregulation of the financial sector in the United States
fostered greater risktaking by finance sector firms through the creation
of innovative financialinstruments and practices, including securitization of loan obligations of various sorts and credit default swaps. This caused a series of financial crises, including the savings and loan crisis, the Long-Term Capital Management (LTCM) crisis, each of which necessitated major bailouts, and the derivatives scandals of 1994. These warning signs were ignored as financial deregulating continued, even in view of the inadequacy of industry self-regulation as shown by the financial collapses and bailout. The 1998 bailout of LTCM sent the signal to large "too-big-to-fail" financial firms that they would not have to suffer the consequences of the great risks they take. Thus, the greater risktaking allowed by deregulation and encouraged by the bailout paved the way for the financial crisis of 2007–08.
The deregulation movement of the late 20th century had substantial
economic effects and engendered substantial controversy. The movement
was based on intellectual perspectives which prescribed substantial
scope for market forces, and opposing perspectives have been in play in
national and international discourse.
The movement toward greater reliance on market forces has been closely related to the growth of economic and institutional globalization between about 1950 and 2010.
For deregulation
Many economists have concluded that a trend towards deregulation will
increase economic welfare long-term and a sustainable free market
system. Regarding the electricity market, contemporary academic Adam
Thierer, "The first step toward creating a free market in electricity is
to repeal the federal statutes and regulations that hinder electricity
competition and consumer choice." This viewpoint stretches back centuries. Classical economist Adam Smith argued the benefits of deregulation in his 1776 work, The Wealth of Nations:
[Without
trade restrictions] the obvious and simple system of natural liberty
establishes itself of its own accord. Every man...is left perfectly free
to pursue his own interest in his own way.... The sovereign is
completely discharged from a duty [for which] no human wisdom or
knowledge could ever be sufficient; the duty of superintending the
industry of private people, and of directing it towards the employments
most suitable to the interest of the society.
Scholars
who theorize that deregulation is beneficial to society often cite what
is known as the Iron Law of Regulation, which states that all
regulation eventually leads to a net loss in social welfare.
Against deregulation
Critics of economic liberalization
and deregulation cite the benefits of regulation, and believe that
certain regulations do not distort markets and allow companies to
continue to be competitive, or according to some, grow in competition. Much as the state plays an important role through issues such as property rights, appropriate regulation is argued by some to be "crucial to realise the benefits of service liberalisation".
Critics of deregulation often cite the need of regulation in order to:
create a level playing field and ensure competition (e.g., by ensuring new energy providers have competitive access to the national grid);
guarantee wide access to services (e.g., ensuring poorer areas where profit margins are lower are also provided with electricity and health services); and,
prevent financial instability and protect consumer savings from excessive risk-taking by financial institutions.
Sharon Beder, a writer with PR Watch, wrote "Electricity deregulation
was supposed to bring cheaper electricity prices and more choice of
suppliers to householders. Instead it has brought wildly volatile
wholesale prices and undermined the reliability of the electricity
supply."
William K. Black says that inappropriate deregulation helped create a criminogenic environment in the savings and loan industry, which attracted opportunistic control frauds like Charles Keating,
whose massive political campaign contributions were used successfully
to further remove regulatory oversight. The combination substantially
delayed effective governmental action, thereby substantially increasing
the losses when the fraudulent Ponzi schemes
finally collapsed and were exposed. After the collapse, regulators in
the Office of the Comptroller of the Currency (OCC) and the Office of
Thrift Supervision (OTS) were finally allowed to file thousands of
criminal complaints that led to over a thousand felony convictions of
key Savings and Loan insiders.
By contrast, between 2007 and 2010, the OCC and OTS combined made zero
criminal referrals; Black concluded that elite financial fraud has
effectively been decriminalized.
Economist Jayati Ghosh
is of the opinion that deregulation is responsible for increasing price
volatility on the commodity market. This particularly affects people
and economies in developing countries. More and more homogenization of
financial institution which may also be a result of deregulation turns
out to be a major concern for small-scale producers in those countries.
