How to avoid fraud and corporate crime (while improving compliance programs) from Rafael Aguilera Gordillo, professor of Corporate Compliance and International Security.
Increasingly complex economic crime is jeopardizing justice in general and criminal law in particular.
On many occasions, there are issues with effectively facing the questions and difficulties posed by corporate criminality and white-collar crime. For this reason, “traditional” criminal law should assume theories and tools from other sciences, such as economics, sociology, political science, etc., which have proved to be useful for analyzing human behavior in organizations and the decision-making process. The application of some concrete research areas coming from these theories, such as “new institutionalism” or “game theory,” can be very effective to predict and prevent possible criminal behavior or corrupt practices in businesses, associations, foundations, political parties and so on.
The “new institutionalism of rational choice” is not limited to introducing the social context in individual decision-making; it also offers a joint analysis about the structure and functioning of the organizations themselves. In addition to this, this theory works without breaking the field of social sciences on its multiple irreconcilable fronts (economic, political, sociological, historical, philosophical). This is possible thanks to OSTROM, who develops a theory that brings together institutional analysis with the rational choice theory.
Succinctly, it can be said that OSTROM[1] highlights the following universal elements, which are present in every institution:
- Participants (individual or corporate)
- Participants’ status on the organization chart
- Potential results that participants can obtain
- A set of permissible actions, as well as the function that links actions and results
- Control of actions and results by individuals according to this function
- Available information on actions and results
- Cost and benefits of actions and results
However, HODGES rightly points out in his paper, “Ethics in Business Practice and Regulation” the limited success of rational choice and a basic deterrence model[2] in order to analyze wrongdoings or the reasons people commit crimes. Therefore, to overcome this problem, I propose the assumption of the postulates of game theory and use their methodological tools in compliance and corporate criminal law areas.
Game Theory in Compliance
Game theory (frequently used in economics, diplomacy, biology, etc.) is mainly focused on the dynamics of action and strategic interaction among participants who act according to their own interests. This theory explains how individuals, through their rational behavior and based on their interactions with others, provide themselves with regulation. These situations originate coordination norms or conventions that culminate in political, mercantile, civil organizations and, ultimately, in the social pact that can materialize in a constitution.
Moreover, this theory is even appropriate to perform an analysis of the origin of rule of law, the law enforcement, the power as coercive power reserved to the state and how other entities and institutions arise; it may also help to clarify how the state has grown in structure and developed standards in democratic regimes.
An article that dealt with game theory in law can be quoted,[3], [4] but it was ELSTER[5] who stood out in his study of how spontaneous order arises, in what he called “Hayek’s program.” In purity, it is a very important reflection for the world of law. This author defends and argues that the sources of law do not arise by the legislator, but actually come from a more remote phenomenon (but also less arbitrary): Game theory helps to clarify how institutions arise and work to respond to the paradoxes of relations between interacting subjects.
This theory is accompanied by a valuable methodological development that deals with the analysis of the decision-making processes, taking into consideration such important matters as the informational asymmetries themselves or the compliance or strategic breach – an example of this is the famous Prisoner’s Dilemma.
These are fully assumable theories to reconfigure modern concepts of compliance and corporate criminal law. They explain human behavior, taking into account transcendental aspects such as correlations and tactical elements with respect to other individuals or groups of individuals, as well as the influence of organizations or businesses.
The theories mentioned above are based on methodologies of pragmatic analysis of proven validity in other fields of extensive scientific tradition. Therefore, the application of these can be very useful tools for the prediction and prevention of possible criminal behavior in the process of developing corporate compliance programs or crime prevention programs, through the modelling of possible behaviors, strategies and criminally relevant risks. The resulting corporate crime prevention programs will be much better adapted to the organizational reality of the business, since it truly considers their particularities and differentiating elements (information flows, status of the members in the organization chart, set of possible decisions, etc.).
A Link Between Compliance and Big Data or AI
Additionally, it is increasingly common to use software suits to analyze risks, costs and benefits in business decision-making processes. These tools use advanced analytic techniques (e.g. very large, diverse data sets that include structured, semi-structured and unstructured data, aka big data). Moreover, AI is allowing machines and their powerful processors to use huge amounts of data and information to make decisions, solve problems and even learn through the so-called “master algorithms.” The combination of big data and AI is increasingly facilitating decision-making processes in businesses and helping them to avoid fraud and predict risks, breaches and legal noncompliance. Nevertheless, big data and AI raise doubts and serious dilemmas when they are analyzed from an ethical or legal perspective.
Essentially, many of these software solutions are based on algorithms and models of applied mathematics that come from the theories mentioned above. In short, it can be said that computer science it is also assuming the validity and big utility of these theories and mathematical modeling.
Therefore, a determined integration of game theory and new institutionalism in the field of corporate compliance and criminal law would also allow the establishment of a clear link between new technologies and corporate crime or fraud and would help overcome the problems and dilemmas associated with the use of AI and big data in businesses.
[1] OSTROM, E.; Understanding Institutional Diversity. Princeton, 2005.
[2] BROOKS,T.; Deterrence, 2014.
[3] ULLMANN-MARGALIT, E.; The Emergence of Norms, 1977.
[4] AXELROD, R.; The Evolution of Cooperation, 1984.
[5] Elster, J.; The cement of society: a study of social order, 1989.
Rafael Aguilera Gordillo is professor of Corporate Compliance and International Security at 
