Underestimating Fraud

Abstract

Over-criminalization in white collar crime can be viewed as overestimating the harm of fraud, leading to over-reliance on criminal sanctions. In this article, I present evidence that courts instead systematically underestimate the harm of fraud. Since underestimation bias could limit criminal liability to the most egregious cases of fraud, this may be welcomed by critics of white collar over-criminalization. Because this judicial underestimation bias is even stronger in the civil context, however, it ultimately exacerbates over-criminalization. The typical substitute for criminal sanctions is civil and regulatory liability, and the stronger civil bias cripples those sanctions’ effectiveness. With a comparatively limited scope for civil fraud enforcement, prosecutors may instead increase reliance on criminal sanctions. Moreover, this civil-criminal bias disparity will sabotage the judicial development of clarity in the white collar enforcement framework.