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Risk Management

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Plenty More Madoffs In The Sea

A criminologist claims that white collar crime is proliferating in the financial industry due to a continuing lack of adequate regulation.

Bernie Madoff might be the most infamous white collar criminal of recent years – but there are plenty more Madoffs in the sea, according to Professor David Friedrichs, white collar crime expert at the University of Scranton.

Friedrichs claims that white collar crime is proliferating due to a continuing lack of adequate regulation. In addition to Ponzi schemers, inside traders and other individual criminals, lax risk practices are continuing to foster what Friedrichs calls "criminal" actions by banks.

"Dodd-Frank is "grossly inadequate", he argues." There are a series of widely recognized practices that still aren't adequately regulated or prohibited by criminal law, including the taking of excessive risk where risk is offloaded onto American taxpayers, says Friedrichs, who is the author of Trusted Criminals: White Collar Crime in Contemporary Society, 4th ed. (2010).

There have been no significant criminal prosecutions for events that gave rise to the 2008 financial meltdown, despite widespread evidence of misrepresentations, accounting gimmicks and other serious misdeeds in the financial industry, Friedrichs points out.

"On one hand, certain activities [during that period] violated existing criminal law. But because of politics and the expense of prosecuting these very wealthy investment banks, prosecutions haven't happened," he argues.

One of the issues that has still not been sufficiently addressed -- despite provisions in the Dodd-Frank Act -- is executive compensation, Friedrichs suggests.

"We have long-standing laws that prohibit hapless people from walking into banks with a gun. We don't have laws prohibiting top CEOs from walking into board rooms with huge conflicts of interest and award grossly inflated compensation," he suggests.

While there have been attempts to put caps on compensation for large banks that were bailed out, banks have found various ways to evade those limitations, Friedrichs adds. "But the reward structure still rewards bank executives for taking huge risk."

If banks continue to take risks, executives continue to be overpaid for taking risk, and regulators don't tighten their belts even more, we will see plenty more Madoffs and rogue traders, Friedrichs says.

And we had better watch out for another potentially devastating financial crisis too. Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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