Category: Tax avoidance/evasion

Too Big to Punish

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.

A New Generation of Corporate Tax Traitors

Large U.S.-based corporations have long demonstrated that they are willing to put profits before patriotism. Over the past two decades, about two dozen of those companies have moved their legal headquarters offshore in order to drastically reduce their federal tax obligations. This disreputable practice is once again in vogue and being brought to a new level by Pfizer’s effort to acquire AstraZeneca and register the combined operation in the United Kingdom. The big Walgreen drugstore chain is also considering a foreign reincorporation move.

During the last big wave of what are politely known as corporate inversions, there was a great deal of protest. The decision by companies such as Tyco International and Ingersoll-Rand to reincorporate abroad was widely denounced as being akin to treason. Reacting to the controversy, Stanley Works dropped plans for a similar move.

Today there is surprisingly little anger over Pfizer’s plan. In fact, the business press is filled with articles indicating that numerous other companies are thinking along the same lines. Pfizer is facing some opposition, but it is mainly in Britain, where the company’s CEO Ian Read (photo) was grilled by members of parliament concerned that the merger will have a negative impact on employment at AstraZeneca.

While Pfizer has been quite open about the tax dodging aspect of its takeover bid, companies involved in inversions tend to justify their move by emphasizing the global nature of their business. The problem with this argument is that it is not supported by the facts. The companies that reincorporate abroad continue to do more business in the United States than in any other country. For example, the purportedly Irish company Ingersoll-Rand derives 59 percent of its revenues from the United States and has 80 percent of its long-lived assets in that country.

Inverted companies usually continue to trade on U.S. stock exchanges and keep their real headquarters at home. They also continue to win contract awards from the federal government. Accenture, another company claiming to be Irish, does more than $1 billion a year in business with Uncle Sam.

Along with their federal tax avoidance, many of the turncoat companies also take widespread advantage of tax breaks and other economic development subsidies from state and local governments. Here are some of the aggregate totals assembled by my colleagues and me at Good Jobs First for our Subsidy Tracker database:

If Pfizer succeeds in its bid, it would add another $200 million to this list, plus $9.2 million that has gone to AstraZeneca’s U.S. operations. Walgreen has received more than $12 million in subsidies.

Along with showing little loyalty to the United States, the corporate tax traitors do not hesitate to abandon their adopted countries when it is financially advantageous to do so. A number of the companies that had reincorporated in Bermuda and the Cayman Islands in the late 1990s and early 2000s subsequently moved to Europe. These include Ingersoll-Rand, Tyco International and Seagate Technology.

Doing so allowed them to avoid the stigma and legal complications of being based in Caribbean tax havens while still enjoying the relatively low corporate tax rates provided by countries such as Ireland and Switzerland. Britain, the intended new home of Pfizer, is now also regarded as one of the more respectable tax haven destinations.

While pretending to be Irish or Swiss or British may be regarded as more acceptable than pretending to be Bermudan, what these companies are doing is still brazen tax dodging and a betrayal of the country that helped them grow into corporate behemoths in the first place.

After the inversion controversies of the early 2000s, Congress took action that thwarted the practice. In today’s political climate in Washington, it is unlikely that restrictions will be placed on the new generation of runaway corporations. Business apologists are already using the Pfizer deal not as a call to arms to block more relocations but rather as an argument for giving in to longstanding demands to gut what remains of the corporate income tax.

According to this warped logic, the United States will solve the tax haven problem only by becoming one itself.

Slapping Corporate Wrists a Little Harder

moneybagsontherunGovernments will go to ridiculous lengths to punish criminals. States that cling to the death penalty now resort to back-alley methods for obtaining the drugs used in lethal injections, leading to grotesque results such as the recent botched execution of Clayton Lockett in Oklahoma.

When it comes to corporate crime, a very different standard is applied. Prosecutors go out of their way to soften the impact on offenders. Criminal charges are often not filed, and when they are companies are offered deferred prosecution agreements that allow them to pay fines and make promises not to sin again.

Federal prosecutors are now feeling pressure to take a harder line, especially with global banks that may have flouted U.S. laws relating to tax evasion and international sanctions. The New York Times reports that the Justice Department is pushing to get guilty pleas from Credit Suisse, which has faced charges of helping wealthy Americans dodge taxes through secret bank accounts, and BNP Paribas, which is being investigated for violating U.S. economic sanctions against countries such as Sudan and Iran.

Getting a guilty plea from a major bank (rather than from one of its obscure subsidiaries, as happened in the LIBOR-manipulation case involving UBS) would be an important step in affirming that these institutions are not above the law. The problem is that the Justice Department does not seem to want to impose the kind of penalties that normally go along with a criminal conviction.

According to the Times, prosecutors are meeting with banking regulators “about how to criminally punish banks without putting them out of business and damaging the economy.”

We would never hear such a statement made about, say, an illegal gambling ring. There is no concern that going after such an operation would eliminate jobs and harm the economy.

As for banks, even when they are found to have engaged in egregious behavior, they are treated as legitimate institutions that must be preserved. It is true that not every employee may have been involved in criminal misconduct, but that is no reason why the continued survival of the bank in its existing form has to be regarded as an essential component of any resolution of criminal charges.

Corporate crime will not disappear until prosecutors are willing to consider truly punitive penalties for companies that engage in serious misbehavior. By this I mean consequences that go well beyond fines that a company can easily afford (and can often deduct from its taxes).

It’s often said that bringing criminal charges against corporations is pointless, since a company cannot be put in prison. Leaving aside the question of the feasibility of putting corporate executives behind bars, this view fails to acknowledge the other ways in which a firm’s liberty can be restricted.

We see such an example in the current scandal involving Los Angeles Clippers owner Donald Sterling, who is being fined $2.5 million and banned for life by the National Basketball Association for making racist statements but who also may be forced to sell the team. Why is the Justice Department not talking about forcing banks such as Credit Suisse and BNP Paribas to divest themselves of the operations in which the prohibited practices took place? I would prefer to see such criminal enterprises confiscated outright, but that may be too much to hope for.

Prosecutors have to weigh the economic impact of cases that might, for instance, lead to the revocation of a bank’s license to operate, which is considered the corporate equivalent of the death penalty. This is apparently behind the caution being exhibited in the Credit Suisse and BNP Paribas negotiations.

The lesson that prosecutors seem to have taken from the 2002 conviction of Arthur Andersen, the accounting firm that abetted Enron’s frauds, is that putting a company out of business is a big mistake. I don’t understand why.

The demise of Andersen and Enron and Drexel Lambert did not bring about economic calamity. In fact, the economy was probably better off without these corrupt institutions. We might also be better off if today’s miscreants met a similar fate, or at least had to undergo radical restructuring. And that would send a clear message to other corporations that they have to clean up their act.

 

Note: For an analysis of an industry that has a lot to clean up, including widespread wage theft, see the report just issued by the Restaurant Opportunities Center United and other groups on the National Restaurant Association and its members. I contributed the Rogues Gallery section.

Congress’s Corporate Accountability Charades

bosses_900In recent days we’ve seen reprises of that old stand-by from the Congressional repertoire: hearings in which members of the House and Senate express indignation at corporate misconduct. Like similar performances that have come before, these events provided some short-term gratification but in all likelihood will ultimately prove frustrating.

The designated whipping boys this week were General Motors and Caterpillar. Both are legitimate targets. GM is embroiled in one of the worst safety scandals in its history as a result of mounting evidence that for years it concealed evidence of an ignition-switch defect that has been tied to a large number of deadly accidents. Caterpillar is under the gun because of a new Senate report accusing it of using accounting gimmicks to avoid more than $2 billion in federal taxes.

At a hearing of the Senate Commerce committee, GM chief executive Mary Barra was confronted with statements such as “The public is very skeptical of GM,” “GM is not forthcoming” and “I think this goes beyond unacceptable. I believe this is criminal.”

The amazing thing is that these statements were coming from both Democrats and Republicans, who differed little in their critique of the automaker. The same can, for the most part, be said about Barra’s only slightly milder interrogation by the House Energy and Commerce investigative subcommittee. Several Republicans sought to score some political points by emphasizing GM’s previous status as a government-controlled corporation, and Tennessee Republican Marsha Blackburn asked Barra whether the company’s safety lapses were related to the federal bailout (Barra sidestepped the question). Yet they did not press too hard in that direction.

The transcripts of the two GM hearings (available via Nexis) paint a very different picture of Congress from what we usually see these days. As Rep. Peter Welch of Vermont stated in the House hearing: “I have to congratulate General Motors for doing the impossible. You’ve got Republicans and Democrats working together.”

There was a similar seriousness of purpose and absence of simple-minded partisanship in the Senate hearing on Caterpillar. Subcommittee chair Carl Levin, a Michigan Democrat who has done extensive work to highlight corporate tax dodging, was of course aggressive in grilling company executives about Caterpillar’s funneling of vast amounts of profit through a tiny Swiss subsidiary to take advantage of an artificially low tax rate.

Yet the company did not get much sympathy from the Republican members of the subcommittee either, though Wisconsin’s Ron Johnson did manage to interject a reference to “our uncompetitive tax system.”

The unfortunate truth is that hearings such as these end up being nothing but a charade in which members of Congress pretend for a while to be tough on an egregious case of corporate malfeasance before they go back to doing the bidding of the monied interests.

For example, New Hampshire Sen. Kelly Ayotte, who was the one calling GM’s behavior “unacceptable” and “criminal,” sought to weaken the Consumer Financial Protection Bureau last year. Nevada Sen. Dean Heller, who joined in the critical questioning of Barra, once introduced a bill to prevent the Environmental Protection Agency from introducing “job-crushing regulations.”

The problem extends to Democrats as well. Veteran Rep. John Dingell, who was awarded special deference at the House hearing, has long-standing ties to General Motors and the other big U.S. automakers, which have been among his strongest political supporters. His wife Debbie Dingell worked for GM for 30 years. When the 87-year-old Dingell announced earlier this year that he plans to retire from Congress, a GM spokesperson said:  “As a champion of the auto industry, John Dingell had no peer.”

If anything, the inclination of members of Congress to do the bidding of business will only increase, now that the Supreme Court has struck down limits on total amounts wealthy individuals can give to candidates, party committees and PACs. Chief Justice John Roberts wrote: “Money in politics may at times seen repugnant to some, but so too does much of what the First Amendment vigorously protects.”

By once again equating money with speech, Roberts is ensuring that those with the most of it, including giant corporations, are the ones to which Congress, apart from brief periods of public interest grandstanding, will bow.

GE Dumps Workers as It Dredges the Hudson

DUMP_YRD_SIGNFor 30 years, General Electric resisted calls to remove the toxic substances it had dumped into New York’s Hudson River over several decades. Now that the process is well under way, the company is striking back at the state by shutting its cleaned-up plant along the river and moving some 200 jobs to Florida. The workers slated to be laid off feel that they are now being dumped.

The site of the dispute is Fort Edward (about 200 miles north of New York City), where from the late 1940s to the mid-1970s GE produced electric capacitors using insulating material containing polychlorinated biphenyls (PCBs). Vast quantities of PCB-contaminated waste ended up in the river’s waters and riverbed.

By the 1970s PCBs were recognized to be a human carcinogen and their manufacture was banned in the United States.  In 1975 the New York State Department of Environmental Conservation ordered GE to cease its PCB dumping and negotiated a path-breaking settlement under which the company would help pay the cost of cleaning up the pollution that had closed the river to commercial fishing and become a national symbol of corporate irresponsibility.

As the projected cost of the clean-up escalated, GE resisted dredging the river’s sediment, which was estimated to contain more than 130 metric tons of PCBs, and instead proposed dubious alternatives such as using bacteria to try to break down the toxic wastes. The company continued this obstruction for years, even after the EPA ordered it in 2001 to pay an estimated $460 million to remove 2.65 million cubic yards of sediment. The legal battle finally ended in 2005, but it took until 2009 for GE to actually begin the dredging. The process is now in its fifth year.

The workers at the Fort Edward plant may not be around to celebrate the completion of the clean-up. A few weeks ago, GE announced that it planned to close the plant and move the operation to Clearwater, Florida. The Fort Edward workers have been represented by the United Electrical (UE) union for the past 70 years, while the Clearwater plant—as you might expect—is non-union.

The Fort Edward move is just the latest of a long series of actions by GE that have weakened the economy of upstate New York. The city of Schenectady, where Thomas Edison moved his electrical equipment operation in 1886, has alone lost tens of thousands of jobs through waves of GE downsizing.

GE also seems to feel no sense of obligation in connection with the economic development subsidies it has received from state and local government agencies in New York. The biggest giveaways have come downstate. In 1987, a year after it was acquired by GE, NBC pressured New York City to give it $98 million in tax breaks under the threat of moving its operations to New Jersey.  In 1999 investment house Kidder Peabody, then owned by GE, got its own $31 million package to stay in the city.

There have also been subsidies upstate. For example, in 2009 GE got a $5 million grant and a $2 million tax abatement for its operations in Schenectady. The company’s research center in Niskayuna, New York has received millions of dollars in local tax breaks.

When GE has not received enough subsidies for its satisfaction, the company sometimes tries to reduce its local tax bills by challenging the assessed value of its property. In 2002, for example, it sued to get the value of its turbine plant in Rotterdam, New York reduced from $159 million to $41 million. A compromise ruling gave GE some of what it wanted and forced the town to reimburse the company about $6 million. Not satisfied, the company later brought a new challenge and got the town to negotiate a payment-in-lieu-of-taxes deal.

And, of course, GE is notorious for its dodging in other states and at the federal level, where it also gets subsidized through agencies such as the Export-Import Bank and got TARP-related assistance for its GE Capital unit.

Members of UE Local 332 are vowing to fight the plant shutdown, but they are up against a company that has shown it is  willing to go to great lengths to get its way on environmental, labor and tax issues.

Corporate Privacy is Alive and Well

we-the-corporations02-e1294670618870Recent revelations about the electronic surveillance programs of the federal government, which are being carried out with the cooperation of large telecommunications and internet companies, show that personal privacy rights are in serious peril.

Much is being said and written about the discrepancy between the seemingly invincible status of the Second Amendment and the disintegrating Fourth Amendment. Yet the more significant contrast may be between individuals and corporations with regard to privacy and protection from government intrusion.

Despite all the complaints from business groups about the supposedly overbearing Obama Administration, large corporations have it pretty good. This is especially the case in the matter of taxes.

Although the finances of publicly traded companies are supposed to be an open book, firms are not required to make public their tax returns. This allows them to conceal the inconsistencies between what they disclose to shareholders and what they report to Uncle Sam. The recent report by the Senate Permanent Subcommittee on Investigations about tax dodging by Apple showed there was a $4.4 billion discrepancy between the FY2011 tax liability presented in the company’s 10-K annual report and what it listed in its corporate tax return (which the committee had to subpoena).

Revelations about Apple and other tax dodging companies has not resulted in any action by Congress. The European Union, by contrast, is moving ahead with a transparency initiative that will thwart tax avoidance and illegal financial flows.

Anti-corruption and pro-transparency groups in the Financial Accountability and Corporate Transparency (FACT) Coalition have been pressing the Obama Administration to support a plan, backed by British Prime Minister David Cameron, to require the registration of owners of shell companies—a move that would make illicit financial transfers more difficult. The idea will be discussed at the upcoming G8 summit, but there is little indication that Obama, much less the U.S. Congress, is prepared to sign on to Cameron’s “transparency revolution.”

Large corporations enjoy a great deal of privacy with regard to state as well as federal tax liabilities. Publicly traded companies are required only to disclose aggregate figures on the taxes they are paying (or not paying) to the states overall, making it impossible to get a clue on how much dodging is going on in individual states. Although there have been efforts at times to compel publicly traded companies to make public their state tax returns, those documents remain as private as their federal returns.

Corporate financial statements are also usually devoid of any information on the billions of dollars companies receive each year in economic development subsidies from state and local governments. There has, however, been progress in piercing the corporate privacy veil in this arena, but it is mixed.

At the state level, disclosure is better than it has ever been, but there is a great deal of inconsistency from state to state and from program to program within states. Much of the transparency progress relates to grant and low-cost loans, while the tax breaks—which are often the big-ticket items—lag. Fewer than half the states post a significant amount of information online about corporate tax credits.

And as my colleagues and I at Good Jobs First showed in a recent report, disclosure is even more primitive among most large cities and counties. All the disclosed data is collected in our Subsidy Tracker search engine.

Taxes and subsidies are not the only areas in which corporate privacy remains strong. There are also serious limitations, for example, in what companies have to reveal about their labor practices. Even publicly traded companies are providing less and less in their 10-K annual reports about collective bargaining. Reading the 10-K of Wal-Mart, for instance, you would never know that it has fought tooth-and-nail against unions and is now facing a non-traditional organizing campaign. Whether they are sympathetic or not to the goals of the campaign, shouldn’t shareholders at least be told that it exists and what the company is doing in response?

As poor as the transparency rules are for publicly traded companies, they shine in connection with the absence of significant requirements with regard to privately held firms. The secrecy afforded to family-controlled mega-corporations such as Koch Industries and Cargill is a serious public policy problem.

While companies such as Facebook and Google claim to be sympathetic to the concerns of their customers about government surveillance, they continue to enjoy a higher level of privacy. Corporations have been aggressive in asserting First Amendment rights equivalent to those of natural persons, but when it comes to the Fourth Amendment, they seem to be ahead of us humans.

Apologies and Apple

bad-appleIn 2010 Texas Rep. Joe Barton took the bizarre step of apologizing to BP for the Obama Administration’s effort to get the oil giant to compensate those affected by its massive spill in the Gulf of Mexico. Barton faced a firestorm of criticism and had to retract his statement.

It will be interesting to see if Sen. Rand Paul has to do the same with his outrageous statement the other day arguing that the Senate should apologize to Apple for the report of its investigations subcommittee documenting brazen tax dodging by the company. “I would say what we really need to do is to apologize to Apple, compliment them for the job creation they are doing, and get about doing our job,” Paul declared at a hearing to discuss the report.

I don’t know how Apple CEO Tim Cook restrained himself from jumping up and giving Paul a big wet kiss on the lips. Cook instead offered testimony that was part p.r. spiel about the wonderfulness of Apple and part outright dishonesty about its tax practices. Among his claims: “Apple does not use tax gimmicks.”

The problem is that the investigations subcommittee’s 40-page report described an array of loopholes and tricks by which Apple has shielded tens of billions of dollars from federal taxation.  At the center of the scheme is the artificial designation of vast amounts of cash as being held offshore to keep it outside the reach of the IRS. That hoard, which now totals more than $100 billion, is actually, the New York Times reports, held in bank accounts in New York in the name of Apple subsidiaries based in Ireland.

For tax purposes, Apple claims that its key Irish entity has no legal residency (nor a physical presence or employees), meaning that it is not effectively taxed anywhere. A recent analysis by Citizens for Tax Justice concluded that Apple has paid “almost no income taxes to any country” on its offshore stash. This undermines the arguments made by Apple and other corporations for a new repatriation tax holiday or a shift to a territorial tax system.

“Apple has a very strong moral compass, and we believe in really good corporate citizenship,” Cook recently told the Washington Post. That claim was already preposterous, given past revelations about abysmal working conditions at the company’s supplier plants in China.

Tax dodging, unfortunately, is not widely regarded as being on a par with sweatshops as an indicator of corporate social irresponsibility. Apple, for instance, feels compelled to publish material asserting that it and its suppliers support labor and human rights and that they operate in an environmentally sound manner. There is no such statement on its website about compliance with tax laws.

Apple, like just about every other large corporation, not only manipulates the federal tax code but does the same at the state and local level, both through accounting schemes and by negotiating economic development subsidy deals, which frequently include corporate income tax credits, business property tax abatements and the like.

Last year, for example, Apple took an $89 million subsidy package to build a data center in Reno, Nevada that was expected to create only 35 permanent Apple employees. Three years earlier, Apple got a state subsidy package in North Carolina worth over $46 million (plus more at the local level) for a similar facility that was projected to produce only 50 permanent jobs.

Apple and other companies justify the taking of subsidies because it is legal and because it is usually linked to job creation, though in the case of Apple the number of jobs, at the data centers at least, is minute compared to the lost tax revenue.

What demands by rich companies for subsidies they don’t need really shows is that tax minimization is not, as corporate apologists would have us believe, just a response to the complexity of the federal tax code. It is a compulsion to increase net income, regardless of the consequences for the public. That is part of the definition of corporate irresponsibility.

Companies like Apple will continue to get away with fiscal murder until tax dodging and excessive subsidy taking are as stigmatized as the use of sweatshop labor and toxic dumping. At that point, even politicians of Rand Paul’s ilk might have to think twice about challenging the right of Congress to investigate unscrupulous tax accounting practices.

Amazon Gets Its Way

amazonWhen companies get subsidies from state and local governments, it usually means that they have to pay less in taxes. Internet retailing behemoth Amazon.com built its business on making sure it could avoid collecting sales taxes from many of its customers, thus allowing it to undercut its brick and mortar rivals.

It now looks like that indirect subsidy is finally coming to an end. Congress seems poised to pass legislation that would require all online merchants with $1 million or more in revenue (Amazon’s annual sales are 60,000 times larger at $61 billion) to collect state and municipal sales taxes from customers anywhere in the country. This will be a godsend to struggling governments that need the revenue to pay for education, healthcare and other vital services.

Amazon has already come to terms with this policy change and in fact has been taking steps to exploit it. As has been widely reported, Amazon recognizes that the next stage in internet retailing is same-day delivery, at least in selected areas. To make that service possible, Amazon needs to greatly expand its network of huge distribution centers from which all those Kindles and toys and kitchen gadgets can be quickly transported to impatient customers. The company just reported a 37 percent drop in its first quarter profits that has been attributed in part to the cost of expanding that distribution network.

Don’t shed any tears for Amazon. That drop is probably just a blip. The company has already taken steps to radically reduce the cost of building those new facilities.

It has done this by using its sales tax collection practices as leverage in negotiating with state governments. For several years, the company negotiated special exemptions from the requirement to collect taxes in those states where it had a physical presence such as a warehouse. In some states, such as South Carolina in 2011, it used the promise of job creation linked to new distribution centers as bait to get the exemptions.

When necessary, the company also tried to use those promises to evade obligations to make good on judgments concerning uncollected past taxes. For example, last year the company reached a deal with Texas that allowed it to skate on a $269 million assessment for uncollected taxes. In exchange, the company agreed to invest $200 million on facilities it would have had to build anyway.

The company is also shifting its demands to traditional economic development subsidies such as income tax credits, property tax abatements and cash grants. For example, the company got a $7.5 million state grant and a $1 million local abatement for a distribution center it agreed to build in Delaware, and it agreed to build two such facilities in New Jersey on the condition that it receive a subsidy package, the value of which has not yet been announced

Amazon has also received a $2 million tax credit and up to $300,000 in training grants from the Indiana Economic Development Corporation for a fulfillment center it agreed to build in Jeffersonville. That agency — whose website lures companies with the pitch “Looking for a right-to-work state with all the right resources, business incentives, low corporate tax rates and AAA credit rating in place to reach your full potential?  – is in tune with Amazon’s sensibilities. For in addition to seeking financial assistance, Amazon takes advantage of the implicit subsidy created by weak labor laws.

The fact that its U.S. operations have remained entirely non-union has made it easier for the company to impose inhuman working conditions in its facilities, which have been the target of criticism by groups such as Working Washington. The controversy has also emerged at Amazon’s operations in Germany, where the company was accused of using neo-Nazi thugs to intimidate immigrant workers at the facilities.

Amazon, it appears, will stop at nothing in its quest to dominate online commerce.

Violating the Norm at Deutsche Bank

Layout 1Corporate annual meetings and the publication of company annual reports usually come off like clockwork. Deutsche Bank, however, has found itself in the awkward position of having to call an extraordinary general meeting and delay the issuance of its annual financial documents until after that event.

These unusual measures are symptoms of the disarray of the giant German financial institution as it copes with a series of legal complications stemming from its own ethical shortcomings.

The special meeting was necessitated by a court ruling that invalidated votes that had been taken at last year’s scheduled shareholder gathering. That ruling came as the result of a legal challenge brought by the heirs of German media tycoon Leo Kirch, who blame the bank for forcing his company into bankruptcy.

There’s a silver lining in this for Deutsche Bank management, since the delay in the publication of the annual report (and the 20-F filing with the U.S. Securities and Exchange Commission) means that it will have more time before it needs to give more details about the various legal messes it is in.

It’s not easy keeping track of them all. Deutsche Bank’s reputation has been tarnished in a variety of ways. This is not to say that the bank’s image started off spotless. It did, after all, actively collaborate with the Nazi regime, helping appropriate the assets of financial institutions in conquered countries.

The sins were not all in the distant past. In 1999 Deutsche Bank acquired New York-based Bankers Trust, which was embroiled in a scandal over its diversion of unclaimed customer assets into its own accounts; it had to pay a $60 million fine and plead guilty to criminal charges.

Deutsche Bank itself was then the subject of wide-ranging investigations of its role in helping wealthy customers, especially those from the U.S., engage in tax evasion. The bank was featured in an investigative report on offshore tax abuses issued by a U.S. Senate committee and was eventually charged by federal prosecutors. In 2010 it had to pay $553 million and admit to criminal wrongdoing to resolve allegations that it participated in transactions that promoted fraudulent tax shelters and generated billions of dollars in U.S. tax losses.

That did not put an end to Deutsche Bank’s tax evasion woes. It is currently reported to be the subject of an investigation by German prosecutors of tax dodging through the use of carbon credits. In December, the bank’s German offices were raided by some 500 police officers seeking evidence for the probe.

Deutsche Bank is also widely reported to be under investigation for its role in the manipulation of the LIBOR interest rate index. There has been speculation that the bank’s co-chief executive, Anshu Jain, might lose his job over the issue. Lower-level employees of the bank have already been disciplined.

There’s more. Deutsche Bank is one of the firms that were sued by the U.S. Federal Housing Finance Agency for abuses in the sale of mortgage-backed securities to Fannie Mae and Freddie Mac (the case is pending). Last year, the U.S. Attorney for the Southern District of New York announced that Deutsche Bank would pay $202 million to settle charges that its MortgageIT unit had repeatedly made false certifications to the U.S. Federal Housing Administration about the quality of mortgages to qualify them for FHA insurance coverage.

In January Deutsche Bank agreed to pay a $1.5 million fine to the U.S. Federal Energy Regulatory Commission to settle charges that it had manipulated energy markets in California in 2010.

Deutsche Bank’s misconduct goes beyond the realm of finance. The bank is being targeted by labor activists in Las Vegas, where it owns two casinos. Members of UNITE HERE have been picketing the bank’s Cosmopolitan casino over management’s insistence on weakening standard industry work rules during negotiations on the union’s first contract at the site. As part of its organizing drive, UNITE HERE created a website called Deutsche Bank Risk Alert to highlight the negative issues surrounding the casino’s parent. It has not lacked for content.

Note: This piece draws from my new Corporate Rap Sheet on Deutsche Bank, which can be found here.

UBS’s Ill-Fated Quest for Financial Glory

UBSUBS seems to be in the news these days more often in connection with its legal problems than in its role as a major financial services company.

This is a result both of some dubious cases brought against it and numerous instances of serious misconduct on the part of the Swiss company. UBS, after all, a corporation that not long ago had to pay $1.5 billion to settle charges that it helped manipulate the LIBOR interest rate index.

In the dubious category is a case brought by a group of its U.S. customers who tried to collect damages from the bank after it had revealed their secret accounts and they had to pay hefty penalties to avoid tax evasion charges for unreported income. A U.S. appellate court in Chicago recently upheld a lower court’s dismissal with a ruling that was, in more than one sense, dismissive. U.S. Circuit Court Judge Richard Posner wrote that UBS “has no duty to treat [the plaintiffs] like children or illiterates, and thus remind them that they have to pay taxes on the income on their deposits.” Posner went on to state: “This lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn’t asked for the imposition of sanctions on the plaintiffs and class counsel.”

This is not to say that UBS was blameless. The lawsuit came after a former UBS banker turned whistleblower had revealed how the bank actively assisted wealthy Americans seeking to hide income from the IRS. Federal prosecutors targeted UBS, which in 2009 had to pay $780 million and sign a deferred prosecution agreement to settle criminal charges of having defrauded U.S. tax authorities.

The feds then pressured UBS to hand over account information on more than 50,000 U.S. customers. UBS and the Swiss government, seeking to retain the country’s tradition of bank secrecy, resisted but in the end agreed to spill the beans on a smaller group of depositors. Using that information, the IRS went after a bunch of those tax dodgers, some of whom then foolishly thought they could use the courts to get UBS to cover their tax bills.

UBS recently prevailed in another lawsuit filed in response to a different instance of its misconduct. In 2004 the U.S. Federal Reserve fined the bank $100 million for violating U.S. trade sanctions by engaging in currency transactions with parties in countries such as Iran and Libya. Based on that, a group of Americans who had been injured in Hamas and Hezbollah attacks while in Israel sued UBS in 2008 under the Anti-Terrorism Act, arguing that the bank was liable for damages in light of its dealings with Iran, which is said to back those groups. The U.S. appeals court in New York has just upheld a dismissal of the case, though it ruled that the trial judge was wrong in holding that the victims lacked standing to bring the action in the first place.

UBS’s success in these two cases pales in comparison to the damage that its reputation has suffered both from the larger matters that prompted them and from a series of other scandals that have embroiled the company through most of the 15 years since it was created from the merger of two of Switzerland’s three big banks: Swiss Bank Corporation and Union Bank of Switzerland.

After the deal was completed, UBS’s chief executive at the time, Marcel Ospel, set out on an ambitious mission to make the company the world leader in investment banking. It was an ill-fated quest.

When UBS sought to increase its U.S. presence with the acquisition of brokerage house PaineWebber, it inherited a slew of legal problems relating both to PaineWebber’s own deceptive practices in the sale of limited partnerships and those the U.S. firm in turn took on when it bought Kidder Peabody, including a scandal in which a trader fabricated $350 million in trading profits to hide what were actually huge losses.

UBS’s U.S. operation was later caught up in the controversy over conflicts of interest between research and investment banking (UBS paid $80 million as its share of the settlement) and was sued by several U.S. state governments relating to its sale of auction-rate securities. UBS settled the actions by agreeing to pay a total of $150 million in penalties to the states and buy back more than $18 billion of the securities.

After getting bailed out to the tune of some $65 billion by the Swiss government during the financial meltdown in 2008, UBS had to pay $160 million to settle federal and state charges relating to bid-rigging in the municipal securities market. Just after that, UBS was sued by the Federal Housing Finance Agency in an action seeking to recover more than $900 million in losses suffered by Fannie Mae and Freddie Mac from mortgage-backed securities purchased through UBS. (The case is pending.)

UBS faced criticism in 2011 after it came to light that a young trader named Kweku Adoboli working in the bank’s London offices had racked up more than $2 billion in losses. Adoboli was later found guilty of fraud and sentenced to seven years in prison, while UBS was fined £29 million by British regulators for supervisory failures.

And late last year, there was the resolution of the LIBOR manipulation case. In addition to the $1.5 billion in penalties, a Japanese subsidiary of UBS pleaded guilty to a charge of felony wire fraud in U.S. federal court. (By having a foreign subsidiary take the fall, UBS shielded its U.S. operations.) The repercussions of the LIBOR case did not disappear. During a subsequent hearing on the matter in the British Parliament, several former UBS executives were accused of “gross negligence and incompetence.” So much for the dream of financial glory.

Note: This piece draws from my new Corporate Rap Sheet on UBS, which can be found here.