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A Typology of Anti-Fraud Regulations and Policies

In Fraud, I discuss many types of anti-fraud efforts developed by officials at every level of American government, as well as by self-regulatory organizations (SROs), professional gatekeepers, and the press.  The tables below groups these endeavors into distinct policy instruments and offers examples of those policy instruments in action.  It also distinguishes a cluster of policy tools that focus more on pre-transaction market structuring from those that emphasize post-transaction monitoring and enforcement. 

The policy instruments that focus on market structuring seek to create and sustain a set of rules, norms, and practices that will constrain deception and outright fraud, whether for the economy as a whole or for specific economic sectors.  For the most part, these approaches seek to fortify the targets of duplicitous marketing.  They aim to make consumers, investors, and business counterparties less susceptible to imposition by improving their access to truthful information about goods, services, and investments, and by setting contractual defaults that make deceptive marketing more difficult to execute.   The goal here is to embed disclosure norms into day-to-day business practice.  By contrast, the policy instruments that focus on monitoring and enforcement seek to provide compensatory justice to economic actors who have been the victims of duplicitous marketing, and to punish economic actors shown to engage in such duplicity.

One must keep in mind that these two modes of anti-fraud regulation are rarely fully distinct from one another.  Almost all efforts at standard-setting include some mechanisms for monitoring adherence to the standards, as well as modes of enforcement should firms flout the standards.  The imposition of sanctions on wayward firms, moreover, typically have a prospective as well as a retrospective dimension.  Enforcement actions attempt to create deterrence effects, convincing managers of all firms that the potential long-term costs of deceptive practices outweigh their short-term benefits.

We tend to think of policy instruments as deployed by state agencies.  But all of the policy tools described below can also be pursued by fully private entities as well as quasi-public bodies that are not formally part of the government but receive explicit legislative delegation of authority.  Indeed, as I take pains to demonstrate in Fraud, in the United States, private and quasi-public institutions have often taken leading roles in anti-fraud regulation.  The latter include many market-based “reputational” checks against deceptive practices that have emerged over the centuries.  For many American skeptics of governmental regulation, these market-based modes of certifying trustworthiness furnish the best preventive mechanisms.

The tables that follow are intended to convey the broad array of measures that societies have developed to combat the problem of economic deception.  As such, they mostly elide historical turning points and more gradual institutional transformations.  Readers should consider them in conjunction with my essay on sources and methods.  That essay includes several schematics of anti-fraud regulatory ecologies, which furnish historical snapshots of prevailing anti-fraud regimes in specific economic sectors at specific moments.  These diagrams convey the interconnections among public and private anti-fraud institutions in given historical contexts, including the emergence of co-regulatory strategies, in which the government explicitly relies on non-state bodies for some regulatory functions, but retains supervision over those quasi-public agencies.  Collectively, the schematics suggest key intellectual and structural changes in the longer arc of American anti-fraud regulation.

Pre-Transaction Market Structuring

Policy InstrumentsIllustrative Examples
General Public Education
Campaigns
Best practices by consumers & investors
Markers of deception
Warnings about prevalent scams
Contractual Defaults
and Requirements:
Ethos of “Caveat Emptor” as a Way to
Incentivize Skepticism and Scrutiny
(Prevalent in 19th c.)
High evidentiary bars for/practical barriers to civil fraud allegations
High evidentiary bars for/practical barriers to criminal fraud allegations
Contractual Defaults
and Requirements: Ethos of “Caveat Venditor”
(Growing salience, 1880-1975)
Lowering of evidentiary bars for civil/criminal fraud allegations
“Cooling off” periods
Provision of information in standard formats
Specific Pre-Transaction
Information Disclosures
Credit terms (goods and services)
Financial data (investments)
Risk profile
Ingredients
Weights/quantity
Relevant conflicts of interest
Standard-SettingQuality grading
Meaning of trade terms
Accounting rules/principles
Control over Right to Participate in Marketplace:
Certification and Permission for Entry
Licensing regimes
Bonding requirements
Commodity Grading
Bond Rating
Accreditation

Monitoring and Enforcement

Policy InstrumentsIllustrative Examples
Modes of Inspection,
Investigation, and Reporting
Periodic auditing
Monitoring of ad claims and marketing practices (mystery shoppers)
Monitoring of price movements in financial markets
Commodity grading
Reputational Ratings (e.g., creditworthiness)
Complaint mechanisms (Better Business Bureaus, media consumer hotlines, consumer protection agencies)
Mediation/ArbitrationAdvance advice about marketing
Informal adjustments (negotiated by state agencies, quasi-public bodies, or private regulators)
Formal stipulations (same range of facilitators)
ShamingPublic Investigations
Public Reprimands
Control over Right to Participate in Marketplace: Revocation through Administrative ActionCease and desist orders
Denials of access to key market infrastructure (postal fraud order; suspension of exchange membership; denial of access to online payment mechanism)
Suspension of right of private gatekeepers to practice before government agencies
Civil LiabilityFines
Individual civil actions (under general or sector specific anti-deception laws)
Class actions initiated by plaintiff’s bar (from late 1960s)
Class actions initiated by Attorneys General (from mid 1970s)
Settlements
Criminal ProsecutionGeneral false pretenses cases
False advertising cases
Violations of disclosure requirements
Violations of sector specific prohibitions of deception (e.g., insider trading)
Mail/wire fraud cases
Embezzlement cases
Conspiracy to defraud
Criminal violations of government reimbursement programs

©2017 Edward J. Balleisen