Archive for the ‘Tax avoidance/evasion’ Category

Uncle Sam’s Favorite Corporations

Tuesday, March 17th, 2015

UncleSam_WebTeaserIt’s said that the partisan divide is wider than ever, but there is one subject that unites the Left and the Right: opposition to the federal business giveaway programs popularly known as corporate welfare.

These programs include cash grants that underwrite corporate R&D, special tax credits allocated to specific firms, loan guarantees that help companies such as Boeing sell their big-ticket items to foreign customers, and of course the huge amounts of bailout assistance provided by the Treasury Department and the Federal Reserve to major banks during the financial meltdown. The costs to taxpayers is tens of billions of dollars a year.

Back in 1994 then-Labor Secretary Robert Reich gave a speech arguing that it was unfair to cut financial assistance to the poor while ignoring special tax breaks and other benefits enjoyed by business. Reich inspired a strange bedfellows coalition led by public interest advocate Ralph Nader and then-House Budget chair John Kasich (now governor of Ohio). Ultimately, the effort was stymied, as every business subsidy’s entrenched interests lobbied back. The subsidy-industrial complex emerged largely unscathed.

Nonetheless, the anti-corporate welfare movement has continued up to the present, with the latest battled being waged mainly by some Tea Party types against the Export-Import Bank.

Throughout these two decades of subsidy analysis and debate, the focus has been on aggregate costs, either by program, by industry or by type of company. Except for bailouts, very little analysis has been done of which specific corporations benefit the most from federal largesse.

My colleagues and I at Good Jobs First have just completed a project which will allow those on all sides of the debate to identify the companies enjoying corporate welfare. Today we are releasing Subsidy Tracker 3.0, a expansion to the federal level of our database which since 2010 has provided information on the recipients of state and local economic development subsidy awards.

We have collected data on 164,000 awards from 137 federal programs run by 11 cabinet departments and six independent agencies. Much of the data, covering the period from FY 2000 to the present, is extracted from the wider range of content on USA Spending, which also covers non-corporate-welfare money flows such as federal grants to state and local governments and federal contracts. We also tracked down about 40 other sources from a variety of lesser known reports and webpages. Farm subsidies are excluded as they are already ably covered by the Environmental Working Group’s agriculture database.

Our data does not cover the full range of federal business assistance, given that most tax breaks are offered as provisions of the Internal Revenue Code that any qualifying firm can claim. We include only the small number of tax credits (mostly in the energy areas) that are allocated to specific firms. But we’ve got plenty of company-specific grants, loans, loan guarantees and bailouts.

Today we are also releasing a report, Uncle Sam’s Favorite Corporations, that analyzes the federal data. While we don’t endorse or critique any of the wide-ranging programs themselves, we do find some remarkable patterns among the recipients.

The degree of big business dominance of grants and allocated tax credits is comparable to what we previously found for state and local subsidies. A group of 582 large companies account for 67 percent of the $68 billion total, with six companies receiving $1 billion or more.

At the top of the list with $2.2 billion in grants and allocated tax credits is the Spanish energy company Iberdrola, whose U.S. wind farms have made extensive use of a Recovery Act program designed to subsidize renewable energy.

Mainly as a result of the massive rescue programs launched by the Federal Reserve in 2008 to buy up toxic securities and provide liquidity in the wake of the financial meltdown, the totals for loans, loan guarantees and bailout assistance run into the trillions of dollars. These include numerous short-term rollover loans, so the actual amounts outstanding at any given time, which are not readily available, were substantially lower but likely amounted to hundreds of billions of dollars. Since most of these loans were repaid, and in some cases the government made a profit on the lending, we tally the loan and bailout amounts separately from grants and allocated tax credits.

The biggest aggregate bailout recipient is Bank of America, whose gross borrowing (excluding repayments) is just under $3.5 trillion (including the amounts for its Merrill Lynch and Countrywide Financial acquisitions). Three other banks are in the trillion-dollar club: Citigroup ($2.6 trillion), Morgan Stanley ($2.1 trillion) and JPMorgan Chase ($1.3 trillion, including Bear Stearns and Washington Mutual). A dozen U.S. and foreign banks account for 78 percent of total face value of loans, loan guarantees and bailout assistance.

Other key findings:

  • Foreign direct investment accounts for a substantial portion of subsidies. Ten of the 50 parent companies receiving the most in federal grants and allocated tax credits are foreign-based; most of their subsidies were linked to their energy facilities in the United States. Twenty-seven of the 50 biggest recipients of federal loans, loan guarantees and bailout assistance were foreign banks and other financial companies, including Barclays with $943 billion, Royal Bank of Scotland with $652 billion and Credit Suisse with $532 billion. In all cases these amounts involve rollover loans and exclude repayments.
  • A significant share of companies that sell goods and services to the U.S. government also get subsidized by it. Of the 100 largest for-profit federal contractors in FY2014 (excluding joint ventures), 49 have received federal grants or allocated tax credits and 30 have received loans, loan guarantees or bailout assistance. Two dozen have received both forms of assistance. The federal contractor with the most grants and allocated tax credits is General Electric, with $836 million, mostly from the Energy and Defense Departments; the one with the most loans and loan guarantees is Boeing, with $64 billion in assistance from the Export-Import Bank.
  • Federal subsidies have gone to several companies that have reincorporated abroad to avoid U.S. taxes. For example, power equipment producer Eaton (reincorporated in Ireland but actually based in Ohio) has received $32 million in grants and allocated tax credits as well as $7 million in loans and loan guarantees from the Export-Import Bank and other agencies. Oilfield services company Ensco (reincorporated in Britain but really based in Texas) has received $1 billion in support from the Export-Import Bank.
  • Finally, some highly subsidized banks have been involved in cases of misconduct. In the years since receiving their bailouts, several at the top of the recipient list for loans, loan guarantees and bailout assistance have paid hundreds of millions, or billions of dollars to U.S. and European regulators to settle allegations such as investor deception, interest rate manipulation, foreign exchange market manipulation, facilitation of tax evasion by clients, and sanctions violations.

 

Bailouts and Bad Actors

Thursday, March 5th, 2015

moneybagsontherunNewly released transcripts of the 2009 meetings of the Federal Reserve’s open market committee show that monetary policymakers were still agonizing over whether they were doing enough to stabilize the teetering global financial system.

These documents have a special interest for me because, as I discussed in last week’s Digest, my colleagues and I at Good Jobs First recently collected a great deal of data about the Fed’s special bailout programs in 2008 and 2009 as part of the extension of our Subsidy Tracker database into the federal realm. The Fed’s info is part of the more than 160,000 entries we have amassed from 137 federal programs of various kinds. Subsidy Tracker 3.0 will go public on March 17.

In last week’s post I mentioned that the Fed programs involved the outlay of some $29 trillion (yes, trillion) and that the totals for several large banks (Bank of America, Citigroup, Morgan Stanley and JPMorgan Chase ) each exceeded $1 trillion. I pointed out that these totals referred to loan principal and did not reflect repayments (information on which is not readily available).

What I also should have pointed out is that some of the Fed lending consisted of relatively short-term loans that were often rolled over. In other words, the actual amount outstanding at any given time was considerably lower than the eye-popping trillion dollar figures. That’s not to say that the amounts were chicken feed. It’s safe to say that the loan totals were in the hundreds of billions of dollars, and here again company-specific amounts are not available.

This is still high enough to justify the point I was making about the bailout amounts far outstripping the sums these banks have been paying out in settlements with the Justice Department to resolve allegations about investor deception in the sale of what turned out to be toxic securities in the run-up to the financial meltdown. And the amounts still justify anger at the current crusade by the big banks to weaken the Dodd-Frank regulatory safeguards adopted by the same government that bailed them out.

What is also worth pointing out is that the bad actor-bailout recipients are not limited to the big U.S. banks. Large totals also turn up for major European banks that have been involved in their own legal scandals in recent years. The biggest foreign recipient of Fed support turns out to be Barclays, which has an aggregate loan amount (including rollover loans and excluding repayments) of more than $900 billion. Next is Royal Bank of Scotland with more than $600 billion and Credit Suisse with more than $500 billion.

In 2012 Barclays had to pay $450 million to U.S. and European regulators to settle allegations that it manipulated the LIBOR interest rate index. The following year Royal Bank of Scotland had to pay $612 million to settle similar allegations. In 2014 Credit Suisse had to pay $2.6 billion in penalties to settle Justice Department charges that it conspired to help U.S. taxpayers dodge federal taxes. This was a rare instance in which a large company actually had to plead guilty to a criminal charge.

The frustrating truth is that the global financial system is dominated by big banks that seem to have little respect for the law and for financial regulation, but they do not hesitate to turn to government when they need to be rescued from their own excesses.

Another Chance to Punish HSBC

Thursday, February 12th, 2015

swissleaksIt’s reassuring that the Justice Department is reportedly pushing a group of big banks, including Citigroup and JPMorgan Chase, to plead guilty to felony counts in connection with their brazen manipulation of the foreign currency market.

Yet Justice also needs to undo the damage done by its ill-advised 2012 decision to enter into a deferred prosecution agreement with HSBC, which was allowed to pay $1.9 billion in settlements  rather than having to plead guilty to charges that it helped drug traffickers and terrorist groups evade money-laundering restrictions. Those practices had been detailed in a 300-page report by the U.S. Senate’s Permanent Subcommittee on Investigations, whose chair at the time, Sen. Carl Levin, called HSBC’s compliance culture “pervasively polluted for a long time.” A subsequent Matt Tiabbi Rolling Stone article about HSBC’s misdeeds quoted former Senate investigator Jack Blum as saying: “They violated every goddamn law in the book.”

The key prosecutor in the 2012 case was Loretta Lynch, the U.S. Attorney for the Eastern District of New York and now President Obama’s choice to succeed Eric Holder as Attorney General. The deal is back in the news in connection with extraordinary revelations about the role of HSBC’s Swiss private banking unit in abetting widespread tax evasion by thousands of wealthy individuals from around the world.

The International Consortium of Investigative Journalists (ICIJ), working in concert with news organizations around the world, adds another major dimension to the misconduct at HSBC. What ICIJ calls its Swiss Leaks project is based on a vast amount of internal bank data that former HSBC technology employee Hervé Falciani provided to tax authorities in various countries in 2010. A French official later re-leaked the data to Le Monde, whose staffers realized they had more information that they could possibility research on their own and so enlisted ICIJ and others, including 60 Minutes in the U.S., to join in the fun.

All this amounts to one of the most remarkable examples ever of collaborative investigative journalism on a global scale. The ICIJ site has links to investigations published not only in Western Europe but also in countries ranging from Ecuador and Argentina to Egypt and India. The geographic diversity stems from the fact that the leaked data relates to more than 100,000 HSBC clients in some 200 countries.

ICIJ takes pains to point out that there may be legitimate reasons for these people to have accounts in Switzerland, but it is clear that a substantial number of the clients were using them to conceal income from tax collectors. They also included individuals involved in unsavory pursuits such as arms trafficking, blood diamonds and bribery.

Some of the governments that received the data from Falciani have already begun bringing cases against individuals, but the revelations are also causing crises for some governments themselves. This is especially so in Britain, where Prime Minister David Cameron is under fire for having chosen a former HSBC executive to serve as a minister.

Even more precarious is the position of HSBC itself, which stands accused of not just allowing rich people to open the secret accounts but also of actively assisting their tax dodging. The Guardian, for instance, is reporting that HSBC contacted clients to market techniques that would allow them to evade a system under which the bank was supposed to collect a sort of withholding tax on the secret accounts on behalf of European Union revenue authorities.

This brings things back to Loretta Lynch, who is not yet confirmed by the Senate but who is already facing pressure from the likes of Elizabeth Warren to come down harder on HSBC this time around. She should give in to those pressures.

Holder’s departure from the Justice Department creates an opportunity to end the shameful practice of letting unscrupulous large companies buy their way out of serious legal jeopardy with payments, which despite growing in size still do little to deter ongoing corporate crime.

Also see my updated Corporate Rap Sheet on HSBC.

Project Zero Corporate Taxes

Thursday, February 5th, 2015

bad-appleGoogle’s Project Zero works on computer security, but that name could more be more accurately applied to the efforts of high-tech giants and other large U.S. corporations when it comes to federal tax policy: they want to pay less and less, and ultimately nothing at all. President Obama’s new tax reform proposal could end up assisting the business campaign.

Obama is endorsing the long-standing business proposal for a reduction in the statutory rate (from 35 to 28 percent) while at the same time offering an even lower rate (14 percent) on repatriated foreign profits being held abroad and a 19 percent rate on future overseas business income (minus foreign taxes paid). The revenue from the tax on accumulated offshore earnings would be earmarked for infrastructure projects.

Much of the reaction to the plan has framed the offshore provisions as a big tax hit on companies such as Apple, Microsoft and Citigroup. The Business Roundtable accused Obama of seeking “steep tax increases on businesses that will negatively impact their competitiveness.”

This view make sense only if you take as the norm the current effective tax rate imposed on these cash hoards, which is zero. In reality, that cash — which in the case of Apple alone exceeds $130 billion — should be seen as the ill-gotten gains of systematic international tax dodging and thus hardly worthy of preferential tax treatment.

This was made clear with respect to Apple in a 2013 report by the Senate investigations subcommittee that described a wide array of loopholes and tricks used by the iPhone producer. Nonetheless, CEO Tim Cook came to Capitol Hill and testified that Apple was not using gimmicks but simply managing its foreign cash holdings prudently. Sen. Rand Paul was taken in by this deceit and declared that Apple was owed an apology.

Too many members of Congress are willing not only to accept the legitimacy of offshore cash hoards but also to go along with misguided schemes to “incentivize” companies to bring some of that money back home. Last month, Sen. Paul and his Democratic colleague Barbara Boxer called for a “tax holiday” that would allow the repatriation of foreign profits with a tax rate of only 6.5 percent. This would be a replay of 2005 holiday that brought some $300 billion back to the United States, but it turned out that very little of the money was used to stimulate investment and job creation, as proponents had promised. Instead, much of it was spent on corporate stock buybacks.

Although he is not using the term, Obama’s 14 percent proposal amounts to the same kind of dubious tax holiday scheme. His higher rate is being regarded in business circles as simply an opening offer that corporate lobbyists will bring down to “reasonable” levels.

The corporate position on repatriated profits looks all the more unreasonable in light of the recent financial performance of leading offshore cash hoarder Apple. The company has more money than it knows what to do with. In January it reported quarterly profits of $18 billion, thanks to the sale of a ridiculous number of iPhones. This was a record not only for Apple but was the biggest quarterly net in corporate history.

Apple may not be sure how to use that windfall, but like many other large companies it is certain what it does not want to do: pay its fair share of taxes.

The 2014 Corporate Rap Sheet

Wednesday, December 31st, 2014

gotojailThe bull market in corporate crime surged in 2014 as large corporations continued to pay hefty fines and settlements that seem to do little to deter misbehavior in the suites. Payouts in excess of $1 billion have become commonplace and some even reach into eleven figures, as seen in the $16.65 billion settlement Bank of America reached with the Justice Department to resolve federal and state claims relating to the practices of its Merrill Lynch and Countrywide units in the run-up to the financial meltdown.

This came in the same year in which BofA reached a $9.3 billion settlement with the Federal Housing Finance Agency concerning the sale of deficient mortgage-backed securities to Fannie Mae and Freddie Mac and in which the Consumer Financial Protection Bureau ordered the bank to pay $727 million to compensate consumers harmed by deceptive marketing of credit card add-on products.

The BofA cases helped boost the total penalties paid by U.S. and European banks during the year to nearly $65 billion, a 40 percent increase over the previous year, according to a tally by the Boston Consulting Group reported by the Wall Street Journal.

Among the other big banking cases were the following:

  • France’s BNP Paribas pleaded guilty to criminal charges and paid an $8.9 billion penalty to U.S. authorities in connection with charges that it violated financial sanctions against countries such as Sudan and Iran.
  • Citigroup paid $7 billion to settle federal charges relating to the packaging and sale of toxic mortgage-backed securities.
  • U.S. and European regulators fined five banks — JP Morgan Chase, Citigroup, HSBC, Royal Bank of Scotland and UBS — a total of more than $4 billion after accusing them of conspiring to manipulate the foreign currency market.
  • Credit Suisse pleaded guilty to one criminal count of conspiring to aid tax evasion by U.S. customers and paid a penalty of $2.6 billion.
  • JPMorgan Chase paid $1.7 billion to victims of the Ponzi scheme perpetuated by Bernard Madoff to settle civil and criminal charges that it failed to alert authorities about large numbers of suspicious transactions made by Madoff while it was his banker.

Banks were not the only large corporations that found themselves in legal trouble during the year. The auto industry faced a never-ending storm of controversy over its safety practices. Toyota was hit with a $1.2 billion criminal penalty by U.S. authorities for concealing defects from customers and regulators. The National Highway Traffic Safety Administration fined General Motors $35 million (the maximum allowable) for failing to promptly report an ignition switch defect that has been linked to numerous deaths. Hyundai and its subsidiary Kia paid $300 million to settle allegations that they misstated the greenhouse gas emissions of their vehicles.

Toxic dumping. Anadarko Petroleum paid $5.1 billion to resolve federal charges that had been brought in connection with the clean-up of thousands of toxic waste sites around the country resulting from decades of questionable practices by Kerr-McGee, now a subsidiary of Anadarko.

Pipeline safety. The California Public Utilities Commission proposed that $1.4 billion in penalties and fined be imposed on Pacific Gas & Electric in connection with allegations that the company violated federal and state pipeline safety rules before a 2010 natural gas explosion that killed eight people.

Contractor fraud. Supreme Group BV had to pay $288 million in criminal fines and a $146 million civil settlement in connection with allegations that it grossly overcharged the federal government while supplying food and bottled water to U.S. personnel in Afghanistan.

Bribery. The French industrial group Alstom consented to pay $772 million to settle U.S. government charges that it bribed officials in Indonesia and other countries to win power contracts. Earlier in the year, Alcoa paid $384 million to resolve federal charges that it used a middleman to bribe members of Bahrain’s royal family and other officials to win lucrative contracts from the Bahraini government.

Price-fixing. Japan’s Bridgestone Corporation pleaded guilty to charges that it conspired to fix prices of anti-vibration rubber auto parts and had to pay a criminal fine of $425 million.

Defrauding consumers. AT&T Mobility had to pay $105 million to settle allegations by the Federal Trade Commission and the Federal Communications Commission that it unlawfully billed customers for services without their prior knowledge or consent.

The list goes on. Whether the economy is strong or weak, many corporative executives cannot resist the temptation to break the law in the pursuit of profit.

Note: For fuller dossiers on some of the companies listed here, see my Corporate Rap Sheets.

Burger King’s Tax Dodge is Just the Latest of Its Restructuring Schemes

Thursday, August 28th, 2014

mergerkingNothing says America like hamburger chains such as Burger King, yet the fast-food giant is the latest company to put tax dodging above national loyalty.

The home of the Whopper wants to carry out one of the so-called inversions that are all the rage among large U.S. corporations. Burger King is proposing to merge with the much smaller Canadian doughnut and coffee chain Tim Hortons and register the combined company north of the border, where it would be able to take advantage of lower tax rates on its U.S. revenues.

An interesting twist is that a large part of Burger King’s financing for the deal is coming from Warren Buffett, who apart from his investment prowess is known for his statements calling on the wealthy (individuals, at least) to pay more in federal taxes.

While many are criticizing Buffett for hypocrisy, the sage of Omaha seems to be taking refuge behind Burger King’s claim that the deal is not tax-driven but is instead a growth opportunity. That does not pass the laugh test, but it is true that Burger King has been willing to submit to frequent restructuring in its never-ending quest to emerge from the shadow of its much larger rival McDonald’s.

In its 60-year history, Burger King has undergone many changes. In 1967 founders James McLamore and David Edgerton sold the chain to the flour giant Pillsbury, which for two decades struggled to find the right formula for the company. In 1989 Pillsbury was taken over by Britain’s Grand Metropolitan, which continued the ceaseless experimentation. After Grand Met merged with Guinness to form Diageo, Burger King did not fit well with a global company focused on alcoholic beverages.

In 2002 the burger chain was taken over by private equity firms Texas Pacific Group (now TPG Capital) , Bain Capital and Goldman Sachs Capital Partners. After they extracted what they could from the company, the buyout firms arranged for an initial public offering that would allow them to profit even more. Four years after the IPO, the chain was taken over by another private equity firm, 3G Capital of Brazil. After only two years, 3G took a portion of Burger King public again. Now 3G, which partnered with Buffett on the takeover of H.J. Heinz, is at it again with the Tim Hortons deal.

One thing that is clear from this history is that Burger King is not, in fact, a purely American company. But that doesn’t legitimize the Canadian inversion. All it shows is that Burger King’s problems predated the Tim Hortons deal.

The chain has gone through a dizzying series of ownership changes that have probably done little to help its underlying business. And there’s also the issue of how that business is structured. As the Wall Street Journal points out, Burger King is essentially an “assetless company.” It owns less than 1 percent of its nearly 14,000 worldwide outlets, with the rest in the hands of franchisees.

This means that the company is largely removed from the day-to-day operations of its outlets and is instead focused on the royalties it collects from the franchisees. This means that it, even more than other fast-food chains, can claim to be uninvolved in controversial matters such as wage rates and other employment practices.

That posture may no longer be tenable. The recent ruling by the National Labor Relations Board holding McDonald’s jointly liable for labor and wage violations by its franchise operators may very well be applied to other chains.

For decades, Burger King has been treated as a pawn in the financial machinations of global corporations and buyout firms. Now its owners want U.S. taxpayers to help underwrite the latest scheme. Hopefully, they won’t get their way this time.

Handouts for Corporate Tax Deserters

Thursday, July 31st, 2014

moneybags_handoutPresident Obama says “I don’t care if it’s legal—it’s wrong.” Even Fortune magazine calls it “positively un-American.” But will Congress do anything to block the brazen moves by a growing number of large U.S. companies to reincorporate abroad to dodge federal taxes?

One group of Democratic lawmakers is trying to discourage the trend by tightening the restrictions on federal contract awards to so-called inverted companies, but such firms still receive another form of financial assistance from Uncle Sam.

The lawmakers have drafted a bill with the appropriately provocative title of No Contracts for Corporate Deserters Act. It would bar contract awards to reincorporators which are at least 50-percent U.S.-owned and which do no substantial business in the country in which they are nominally based.

Tougher rules are definitely necessary. Although Congress pats itself on the back for the restrictions first enacted during an earlier wave of reincorporations, some of the inverted companies have managed to find loopholes allowing them to continue to enjoy the benefits of extensive federal contracting. Ingersoll-Rand, which purports to be an Irish company but derives 60 percent of its revenue from the United States, has 80 percent of its long-lived assets in this country and has its “corporate center” near Charlotte, North Carolina, received $64 million in federal contracts in 2013. Eaton Corporation, which also claims to have become Irish, received $131 million that year.

In his July 24 remarks on the subject, President Obama also declared: “You shouldn’t get to call yourself an American company only when you want a handout from American taxpayers.” Such handouts are not limited to lucrative contract awards. Inverted companies are also receiving cash grants from the federal government.

Take the case of Eaton. In 2013 it received a $2.4 million grant from the Energy Department’s Conservation Research and Development Program. That was just one of eight grants it received from Energy that year with a total value of about $4 million.

Delphi Automotive, which claims to be based on the island of Jersey in the English Channel, has also received numerous grants from the Energy Department, including $5.1 million last year through the Fossil Energy Research and Development Program.

Grants have also gone to companies involved in recent inversion deals. Pfizer, which was seeking to undergo an inversion through a merger with AstraZeneca but which has dropped the bid for now, received $3.8 million in assistance this year from the Defense Department for work on nanoparticles.

These grants are part of a controversial practice by which the federal government underwrites commercial research activity by large companies in industries such as food processing, pharmaceuticals, aerospace and electric utilities. And this, in turn, is part of the larger sphere of federal financial assistance to business that also includes direct payments, low-cost loans, loan guarantees and the like.

These activities, often labeled corporate welfare, are a frequent target of criticism from both the left and the right. Conservatives are currently engaged in a campaign to eliminate the Export-Import Bank, which provides financing for deals benefiting corporations such as Boeing and Bechtel. Bipartisan efforts such as Green Scissors and the Toward Common Ground reports issued by U.S. PIRG and National Taxpayers Union have sought to end funding for the most wasteful programs.

Those efforts are usually driven by ideology (conservatives don’t want governments “picking winners”), by a desire to cut federal spending, or by other issues (progressives point out that many federal subsidies promote environmentally destructive practices). Now there’s another reason to be up in arms over corporate welfare.

The fact that some “corporate deserters” are getting grants from Uncle Sam could provide an additional form of pressure against the tax dodgers. Seeing these companies get contracts is bad enough; realizing that they may be getting direct handouts is even more infuriating.

Dominant and Diabolical Dynasties

Thursday, July 24th, 2014

mellonFor more than 30 years, Forbes magazine has been publishing a list of the 400 richest Americans. These annual celebrations of wealth are often accompanied by text emphasizing entrepreneurship. Readers are supposed to come away with the conclusion that these tycoons earned their treasure.

Now, in a move that says a great deal about where American society is headed, Forbes has published its first ranking of America’s Richest Families. No longer is the individual striver being venerated; now we are supposed to marvel at the compilation of 185 families with accumulated wealth of at least $1 billion. Forbes, unselfconsciously using a phrase that could have been penned by ruling class analyst William Domhoff, headlines the feature “Dominant Dynasties.”

Perhaps a bit uneasy about glorifying financial aristocracies, Forbes writes: “One thing that stands out is how many of the great fortunes of the mid-19th century have dissipated. The Astors and the Vanderbilts, the Morgans and the Carnegies, none make the cut.”

The fact that not all 150-year-old family fortunes have survived hardly makes the United States a model of economic egalitarianism. Forbes has to admit that the du Ponts, whose wealth dates back two centuries, are still high on the list (to the tune of $15 billion), as are the Rockefellers ($10 billion). The magazine chose to put on its cover members of the sixth and seventh generations of the Mellon dynasty, whose wealth is pegged at $12 billion.

Even among the newer fortunes, many go back several generations. Few of the listed families include living founders. In some cases family members are living of off the success of their forebears; in other cases, they have built on the achievements of their parents and grandparents. Yet in all cases they have benefited from a tax system that increasingly favors inherited wealth.

That tilt dates back to initiatives taken by the man responsible for the fortune enjoyed by the individuals on the Forbes cover: Andrew Mellon (illustration). As Secretary of the Treasury in the 1920s he unabashedly pushed for reductions in income and estate tax rates, even though as one of the country’s richest men he had a great deal to gain personally from those cuts.

Aside from the questions relating to the perpetuation of class structure, there is the issue of where the fortunes came from in the first place. That subject cannot be avoided when the family at the very top of the list, the Waltons, enjoys wealth estimated at $152 billion thanks to their affiliation with a retail empire built on cheap labor, union-busting and a variety of other sins.

The Kochs, number two with $89 billion, have grown rich through the exploitation of fossil fuel-based industries that are threatening the planet, as did the Rockefellers and many others on the list. The du Pont fortune was originally based on gunpowder and was later enhanced by inventions that included dangerous chemicals such as perfluorinated compounds (used in Teflon) linked to serious health and environmental problems.

Lower down on the list is the Steinbrenner fortune ($3.1 billion), which is based not only on the absurd appreciation in the value of the New York Yankees but also from a shipping business whose interests were furthered by illegal campaign contributions to Richard Nixon in the 1970s. There’s also the Lindner fortune ($1.7 billion), which was built in part by Carl Lindner’s close association with the junk bond empire of the felonious Michael Milken.

Balzac is credited with the statement that “behind every great fortune is a great crime.” Further research will be required to know if that is true of all the entries on the Forbes list, but there are no doubt plenty of examples. And along with any specific crimes is the offense against democracy generated by the unbridled accumulation of intergenerational wealth.

Inverted Values

Thursday, July 10th, 2014

medtronic-headquartersConservatives are up in arms about the surge of undocumented women and children coming across the border from Mexico. So great a threat is purportedly being caused by this influx that Republican members of Congress are clamoring for legislation that would allow faster deportations. Even President Obama seems to agree.

Much less urgency is being expressed about another sort of immigration crisis: the presence of a growing number of foreign-based corporations masquerading as American companies. Large-scale tax dodging by these firms does much more harm to the United States than the modest impact of those desperate Central Americans.

A recent report by the Congressional Research Service describes a new wave of companies going through a process politely known as “inversions.” What’s really happened is that these firms have renounced their U.S. “citizenship” and reincorporated themselves in tax haven countries in order to escape federal taxes.

Yet these companies go on operating as before, keeping their U.S. offices, their U.S. sales and all the other benefits of doing business here but not paying their fair share of the cost of government. They are the real illegitimate aliens.

While a few members of Congress have spoken out against this corporate treason, many adhere to the idea that the companies are blameless — that it is the supposedly oppressive tax system that is to blame. The editorialists at the Wall Street Journal, who can always be counted on to go to any length to defend corporate avarice, recently began a piece on inversions by writing: “What kind of country does this to itself?”

This is typical of the pro-corporate mindset: Big business, apparently, can do no wrong, so if a company does something controversial, it is the rest of us who are to blame.

In reality, many of the companies that have turned to inversions are not only tax dodgers; they are bad actors in other respects. Take the case of Medtronic, which is involved in the most recent re-registration deal involving a plan to merge with Covidien, a competitor in the medical devices industry that earlier turned itself into an “Irish” company.

Only a couple of weeks before the Covidien deal became public, the U.S. Justice Department announced that Medtronic would pay $9.9 million to resolve allegations under the False Claims Act that it made improper payments to physicians to get them to implant the company’s pacemakers and defibrillators in Medicare and Medicaid patients. The settlement came less than three years after Medtronic had to pay $23.5 million to resolve another False Claims Act case involving other kinds of improper inducements to physicians.

And five years before that, Medtronic paid $40 million to settle yet another kickback case. In 2010 the company had to pay $268 million to settle lawsuits claiming that defective wires in its defibrillators caused at least 13 deaths.

An even worse track record belongs to Pfizer, which attempted an inversion a couple of months ago by seeking to acquire Britain’s AstraZeneca but has backed off for now. In 2009 Pfizer agreed to pay $2.3 billion to resolve criminal and civil charges relating to the  improper marketing of Bextra and three other medications. The amount was a record for a healthcare fraud settlement. John Kopchinski, a former Pfizer sales representative whose complaint helped bring about the federal investigation, told the New York Times: “The whole culture of Pfizer is driven by sales, and if you didn’t sell drugs illegally, you were not seen as a team player.”

Like Medtronic, Pfizer has had problems with questionable payments. In August 2012 the SEC announced that it had reached a $45 million settlement with the company to resolve charges that its subsidiaries, especially Wyeth, had bribed overseas doctors and other healthcare professionals to increase foreign sales.

Or take the case of Walgreen, which is reported to be planning an inversion of its own. In 2008 it had to pay $35 million to settle claims that it defrauded the federal government by improperly switching patients to different version of three prescription drugs in order to increase its reimbursements from Medicaid. Last year, the Drug Enforcement Administration announced that the giant pharmacy chain would pay a record $80 million in civil penalties to resolve charges that it failed to properly control the sales of narcotic painkillers at some of its stores.

The examples could continue. Corporations resorting to extreme measures such as foreign re-incorporations are not innocent victims. Their tax dodging is just another symptom of corporate cultures that put profit maximization above loyalty to country and adherence to the law.

Too Big to Punish

Thursday, May 22nd, 2014

get_out_of_jail_freeEver since the financial meltdown, corporate critics have been clamoring for criminal charges to be brought against major financial institutions. With the exception of the guilty plea extracted from an obscure subsidiary of UBS in a case involving manipulation of the LIBOR interest rate index, the Obama Administration long resisted these calls, continuing the dubious practice of offering corporate miscreants deferred prosecution agreements and escalating but still affordable fines.

The Justice Department has now given in to the pressure, forcing Credit Suisse’s parent company to plead guilty to a criminal charge of conspiring to aid tax evasion by helping American citizens conceal their wealth through secret offshore accounts. Yet what should be a watershed moment in corporate accountability is starting to feel like a big letdown.

Despite weeks of handwringing by corporate apologists about the risks for a bank of having a criminal conviction, along with impassioned pleas for mercy by Credit Suisse lawyers, the world has hardly come tumbling down for the Swiss financial giant since Attorney General Eric Holder announced the plea.

Particularly unsatisfying is the fact that no top executives at the bank were charged, meaning that we were prevented from seeing any high-level perp walks. While some lower level bank employees were prosecuted, CEO Brady Dougan is getting off scot free. Even the Financial Times found this unseemly, suggesting that he should have had the good manners to resign. Dougan, instead, handled things in classic damage-control mode, treating the matter as over and done, stating: “We can now focus on the future and give our full attention to executing our strategy.”

The Justice Department is bragging about the plea and the $2.6 billion in penalties, but it is downplaying the failure to achieve one of the main objectives of the case. Credit Suisse is not being compelled to turn over the names of the holders of the secret accounts.

Other parts of the federal government seem to be doing everything possible to cushion the impact of the plea. The SEC has decided, at least for the time being, to exempt Credit Suisse from a law that requires a bank to relinquish its investment-advisor license in the event of a guilty plea. The Federal Reserve, which received $100 million of the penalties, issued a “cease and desist order requiring Credit Suisse promptly to address deficiencies in its oversight, management, and controls governing compliance with U.S. laws,” but it has given no indication that the bank’s activities will be restricted.

There are also no signs that the private sector will punish Credit Suisse. Customers do not appear to be shunning the bank, and the stock market has reacted to the plea with equanimity. The company’s stock price has fallen only a few points since the reports of a possible conviction emerged in recent weeks, and in the wake of the actual plea it has held steady.

When an individual is convicted of a crime, his or her life is usually thrown into disarray. Along with a possible loss of liberty, there may be a forfeiture of assets and a loss of livelihood. Especially for white-collar offenders, there is likely to be ostracism.

For corporate offenders, we’ve long seen how companies can buy their way out of serious consequences through non-prosecution and deferred prosecution deals. Now that get-out-of-jail-free card seems to be available to a company with an actual conviction.

Why, then, did the Justice Department bother pursuing criminal charges? It’s difficult to avoid the conclusion that the prosecution was meant solely as a symbolic gesture—a political move to quiet criticism of the administration’s treatment of corporate misconduct.

The handling of the Credit Suisse case may end up doing more harm than good, both in symbolic and substantive terms. The moves to mitigate the impact on the bank neutralize the administration’s effort to appear tough on corporate crime. They also undermine whatever deterrent effect the prosecution was supposed to achieve.

Large corporations may no longer be too big to convict, but they are still regarded as too big to punish.

Note: For details on the sins of Credit Suisse, see its updated Corporate Rap Sheet.