Regulation

Ending the Corporate Crime Wave

Stop Corporate Crime The top executives of giant corporations may still effectively be immune from criminal prosecution for their misdeeds, but the financial penalties imposed on their companies by regulators are beginning to be felt in the bottom line. The question is whether plunging profits are enough to get corporate malefactors to clean up their act.

In February, the Swiss bank UBS posted a quarterly loss of $2.1 billion (and an annual loss of more than $2.7 billion), largely reflecting the $1.5 billion it paid to resolve charges brought by U.S., Swiss and British prosecutors in connection with the bank’s role in manipulating the LIBOR interest rate index.

Recently, the British bank HSBC reported a 17 percent decline in profits brought about to a great extent by the $1.9 billion in penalties it had to pay to resolve allegations by U.S. regulators that its lax internal controls against money laundering aided customers with links to drug trafficking and terrorism.

Oil giant BP noted that its 2012 results were affected by a “net adverse impact” of more than $5 billion relating to the Gulf of Mexico oil spill, for which the company had to pay $4 billion to resolve charges brought by U.S. prosecutors.

GlaxoSmithKline’s announcement of 2012 results noted that its net cash flow was depressed by the cost of legal settlements, including the $3 billion it had to pay the federal government to resolve allegations of illegal marketing of prescription drugs, withholding of crucial safety data and other abuses. GSK went so far as to include a figure for cash flow “before legal settlements” similar to the way companies like to show results before interest, taxes and depreciation to make their performance look better.

It will be interesting to see how institutional investors regard these material financial impacts. Corporations have been breaking the law for a long time, and the penalties they incur have come to be seen as a routine cost of doing business. Many corporate critics thus tend to downplay their significance and instead press for more criminal prosecutions. That chorus has just intensified with a statement by U.S. Attorney General Eric Holder that some banks have grown so large that it is difficult to prosecute them.

It is worth noting, however, that all of the cases cited above contained criminal elements. A Japanese subsidiary of UBS pleaded guilty to a felony wire fraud charge. HSBC, the Justice Department said, “accepted responsibility for its criminal conduct and that of its employees” and was offered a deferred prosecution agreement. A BP unit pleaded guilty to felony manslaughter, environmental crimes and obstruction of Congress. GSK pleaded guilty to a three-count criminal information and consented to enter into a corporate integrity agreement with the federal government.

What was missing, of course, were criminal prosecutions of high-level executives in the firms, who presumably had ultimate responsibility for the misdeeds.

I agree that chief executives should be made to pay a stiff personal price for the anti-social practices of their organizations, but I’m not entirely convinced that putting some of them behind bars would be a foolproof deterrent against corporate misconduct. After all, plenty of businesspeople have gone to prison for insider trading, yet the practice never seems to end.

Financial sanctions may be more effective if the trend toward larger penalties is escalated even further. The wave of billion-dollar settlements may be causing some pain, but the companies—especially huge and highly profitable ones like BP—will easily recover. Penalties for serious offenses need to be raised to the point that they force the company to take drastic action, such as selling off major assets. Or the government could directly seize those assets, as some were urging in the wake of the BP disaster in the gulf.

There would undoubtedly be a major backlash from business interests to a policy of imposing penalties that threaten the survival of companies. Yet the alternative is to go on living amid a perpetual corporate crime wave.

Note: My latest Corporate Rap Sheet is on HSBC, covering both the big penalty cited above and the other scandals surrounding the bank. It can be found here.

The 2012 Corporate Rap Sheet

Corporate crime has been with us for a long time, but 2012 may be remembered as the year in which billion-dollar fines and settlements related to those offenses started to become commonplace. Over the past 12 months, more than half a dozen companies have had to accede to ten-figure penalties (along with plenty of nine-figure cases) to resolve allegations ranging from money laundering and interest-rate manipulation to environmental crimes and illegal marketing of prescription drugs.

The still-unresolved question is whether even these heftier penalties are punitive enough, given that corporate misconduct shows no sign of abating. To help in the consideration of that issue, here is an overview of the year’s corporate misconduct.

BRIBERY. The most notorious corporate bribery scandal of the year involves Wal-Mart, which apart from its unabashed union-busting has tried to cultivate a squeaky clean image. A major investigation by the New York Times in April showed that top executives at the giant retailer thwarted and ultimately shelved an internal probe of extensive bribes paid by lower-level company officials as part of an effort to increase Wal-Mart’s market share in Mexico. A recent follow-up report by the Times provides amazing new details.

Wal-Mart is not alone in its behavior. This year, drug giant Pfizer had to pay $60 million to resolve federal charges related to bribing of doctors, hospital administrators and government regulators in Europe and Asia. Tyco International paid $27 million to resolve bribery charges against several of its subsidiaries. Avon Products is reported to be in discussions with the U.S. Justice Department and the Securities and Exchange Commission to resolve a bribery probe.

MONEY LAUNDERING AND ECONOMIC SANCTIONS. In June the U.S. Justice Department announced that Dutch bank ING would pay $619 million to resolve allegations that it had violated U.S. economic sanctions against countries such as Iran and Cuba. The following month, a U.S. Senate report charged that banking giant HSBC had for years looked the other way as its far-flung operations were being used for money laundering by drug traffickers and potential terrorist financiers. In August, the British bank Standard Chartered agreed to pay $340 million to settle New York State charges that it laundered hundreds of billions of dollars in tainted money for Iran and lied to regulators about its actions; this month it agreed to pay another $327 million to settle related federal charges. Recently, HSBC reached a $1.9 billion money-laundering settlement with federal authorities.

INTEREST-RATE MANIPULATION. This was the year in which it became clear that giant banks have routinely manipulated the key LIBOR interest rate index to their advantage. In June, Barclays agreed to pay about $450 million to settle charges brought over this issue by U.S. and UK regulators. UBS just agreed to pay $1.5 billion to U.S., UK and Swiss authorities and have one of its subsidiaries plead guilty to a criminal fraud charge in connection with LIBOR manipulation.

DISCRIMINATORY LENDING. In July, it was announced that Wells Fargo would pay $175 million to settle allegations that the bank discriminated against black and Latino borrowers in making home mortgage loans.

DECEIVING INVESTORS. In August, Citigroup agreed to pay $590 million to settle a class-action lawsuit alleging that it failed to disclose its full exposure to toxic subprime mortgage debt in the run-up to the 2008 financial crisis. The following month, Bank of America said it would pay $2.4 billion to settle an investor class-action suit charging that it made false and misleading statements during its acquisition of Merrill Lynch during the crisis. In November, JPMorgan Chase and Credit Suisse agreed to pay a total of $417 million to settle SEC charges of deception in the sale of mortgage securities to investors.

DEBT-COLLECTION ABUSES. In October, American Express agreed to pay $112 million to settle charges of abusive debt-collection practices, improper late fees and deceptive marketing of its credit cards.

DEFRAUDING GOVERNMENT. In March, the Justice Department announced that Lockheed Martin would pay $15.9 million to settle allegations that it overcharged the federal government for tools used in military aircraft programs. In October, Bank of America was charged by federal prosecutors with defrauding government-backed mortgage agencies by cranking out faulty loans in the period leading to the financial crisis.

PRICE-FIXING. European antitrust regulators recently imposed the equivalent of nearly $2 billion in fines on electronics companies such as Panasonic, LG, Samsung and Philips for conspiring to fix the prices of television and computer displays. Earlier in the year, the Taiwanese company AU Optronics was fined $500 million by a U.S. court for similar behavior.

ENVIRONMENTAL CRIMES. This year saw a legal milestone in the prosecution of BP for its role in the 2010 Deepwater Horizon drilling accident that killed 11 workers and spilled a vast quantity of crude oil into the Gulf of Mexico. The company pleaded guilty to 14 criminal charges and was hit with $4.5 billion in criminal fines and other penalties. BP was also temporarily barred from getting new federal contracts.

ILLEGAL MARKETING. In July the U.S. Justice Department announced that British pharmaceutical giant GlaxoSmithKline would pay a total of $3 billion to settle criminal and civil charges such as the allegation that it illegally marketed its antidepressants Paxil and Wellbutrin for unapproved and possibly unsafe purposes. The marketing included kickbacks to doctors and other health professionals. The settlement also covered charges relating to the failure to report safety data and overcharging federal healthcare programs. In May, Abbott Laboratories agreed to pay $1.6 billion to settle illegal marketing charges.

COVERING UP SAFETY PROBLEMS. In April, Johnson & Johnson was ordered by a federal judge to pay $1.2 billion after a jury found that the company had concealed safety problems associated with its anti-psychotic drug Risperdal. Toyota was recently fined $17 million by the U.S. Transportation Department for failing to notify regulators about a spate of cases in which floor mats in Lexus SUVs were sliding out of position and interfering with gas pedals.

EXAGGERATING FUEL EFFICIENCY. In November, the U.S. Environmental Protection Agency announced that Hyundai and Kia had overstated the fuel economy ratings of many of the vehicles they had sold over the past two years.

UNSANITARY PRODUCTION. An outbreak of meningitis earlier this year was tied to tainted steroid syringes produced by specialty pharmacies New England Compounding Center and Ameridose that had a history of operating in an unsanitary manner.

FATAL WORKFORCE ACCIDENTS. The Bangladeshi garment factory where a November fire killed more than 100 workers (who had been locked in by their bosses) turned out to be a supplier for Western companies such as Wal-Mart, which is notorious for squeezing contractors to such an extent that they have no choice but to make impossible demands on their employees and force them to work under dangerous conditions.

UNFAIR LABOR PRACTICES. Wal-Mart also creates harsh conditions for its domestic workforce. When a new campaign called OUR Walmart announced plans for peaceful job actions on the big shopping day after Thanksgiving, the company ignored the issues they were raising and tried to get the National Labor Relations Board to block the protests. Other companies that employed anti-union tactics such as lockouts and excessive concessionary demands during the year included Lockheed Martin and Caterpillar.

TAX DODGING. While it is often not technically criminal, tax dodging by large companies frequently bends the law almost beyond recognition. For example, in April an exposé in the New York Times showed how Apple avoids billions of dollars in tax liabilities through elaborate accounting gimmicks such as the “Double Irish with a Dutch Sandwich,” which involves artificially routing profits through various tax haven countries.

FORCED LABOR. In November, global retailer IKEA was revealed to have made use of prison labor in East Germany in the 1980s.

Note: For fuller dossiers on a number of the companies listed here, see my Corporate Rap Sheets. The latest additions to the rap sheet inventory are drug giants AstraZeneca and Eli Lilly.

Pfizer’s Long Corporate Rap Sheet

The Dirt Diggers Digest is taking a break from commentary for the Thanksgiving holiday, but the Corporate Rap Sheets project marches on. I’ve just posted a dossier on drug giant Pfizer. Here is its introduction:

Pfizer made itself the largest pharmaceutical company in the world in large part by purchasing its competitors. In the last dozen years it has carried out three mega-acquisitions: Warner-Lambert in 2000, Pharmacia in 2003, and Wyeth in 2009.

Pfizer has also grown through aggressive marketing—a practice it pioneered back in the 1950s by purchasing unprecedented advertising spreads in medical journals. In 2009 the company had to pay a record $2.3 billion to settle federal charges that one of its subsidiaries had illegally marketed a painkiller called Bextra. Along with the questionable marketing, Pfizer has for decades been at the center of controversies over its pricing, including a price-fixing case that began in 1958.

In the area of product safety, Pfizer’s biggest scandal involved defective heart valves sold by its Shiley subsidiary that led to the deaths of more than 100 people. During the investigation of the matter, information came to light suggesting that the company had deliberately misled regulators about the hazards. Pfizer also inherited safety and other legal controversies through its big acquisitions, including a class action suit over Warner-Lambert’s Rezulin diabetes medication, a big settlement over PCB dumping by Pharmacia, and thousands of lawsuits brought by users of Wyeth’s diet drugs.

Also on Pfizer’s list of scandals are a 2012 bribery settlement; massive tax avoidance; and lawsuits alleging that during a meningitis epidemic in Nigeria in the 1990s the company tested a risky new drug on children without consent from their parents.

READ THE ENTIRE PFIZER RAP SHEET HERE.

The Deadly Consequences of Weak Regulation

Unfortunately, it seems to take a public health crisis for the United States to remember the importance of diligently regulating companies such as drugmakers and food processors. And it is only during such crises that people realize that, despite the whines of corporate-friendly politicians, our problem is that such businesses are regulated too little rather than too much.

This scenario is being played out yet again in the fungal meningitis outbreak that has stricken more than 240 people and killed at least 20 of them around the country. It was only once the bodies began piling up that it became widely known that there has been confusion as to whether state or federal agencies should be overseeing operations such as the New England Compounding Center (NECC), which has been blamed for shipping tens of thousands of contaminated syringes with steroids used by patients with severe pain.

It turns out that the federal Food and Drug Administration had been keeping an eye on NECC, and in December 2006 the agency sent it and several similar companies a warning letter about distributing topical anesthetic creams without federal approval. An FDA press release about the warnings noted that exposure to high concentrations of local anesthetics can cause grave reactions and had in fact been linked to two deaths of users of the creams produced by one of the five firms. The NECC letter also mentioned concerns about the company’s practices related to the repackaging of Avastin, an injectable drug for treating colorectal cancer.

It’s not clear that the FDA letters had any impact. The compounding pharmacies paid little attention, given that a federal judge had previously issued a ruling calling into question the authority of the agency to regulate their business. Supposedly, state pharmacy boards are taking care of the matter. One gets an idea of how serious that is from a Boston Globe story revealing that one of the members of the Massachusetts board is an executive with Ameridose, a compounding pharmacy also owned by NECC principals Barry Cadden and Gregory Conigliaro.

What makes companies such as NECC and Ameridose, both of which have suspended operations, even more dangerous is that they are privately held and thus have to disclose a lot less information about their operations. What they do reveal tends to be self-serving accounts of their supposed commitment to corporate social responsibility. The NECC website now consists solely of its “voluntary” recall, but the full Ameridose site is still up and has a less-than-hard-hitting news section.

There are numerous press releases about the company’s “outstanding” sustainability program, especially its recycling of cardboard and its installation of an ultrasonic humidification system. There are also releases about the company’s participation in a holiday food drive and its sponsorship of several industry conferences.

These are no doubt worthwhile initiatives, but the public might have also wanted to know how Ameridose was dealing with issues such as a 2008 FDA inspection that found that the company had been shipping products before it receive the results of sterility tests. That year Ameridose also had to recall some of its Fentanyl product.

The problems at Ameridose apparently went much deeper. According to reporting by the New York Times, employees at the firm expressed concern to management about serious safety and quality control issues but were rebuffed. One worker was quoted as saying: “The emphasis was always on speed, not on doing the job right.”

NECC and Ameridose are the kinds of companies lionized by Republican politicians preoccupied with defending “job creators” against government incursions in their business. It thus comes as no surprise that a search of the Open Secrets database shows that Conigliaro has contributed four times to Scott Brown’s Senate race in Massachusetts and has given $2,500 to Mitt Romney.

These firms are also among those government-dependent companies not singled out by Romney for mooching. Aside from the portion of their business covered by programs such as Medicare and Medicaid, the USA Spending database shows that Ameridose has received more than $800,000 in contracts from the federal government. In June, the U.S. Army signed an exclusive, five-year purchasing agreement with the firm to supply specialized compounded products for the pediatric intensive care unit at the Army’s Tripler Medical Center in Honolulu.

So the next time a politician complains about excessive regulation, we should keep in mind the risk to that pediatric intensive care unit and the actual harm caused to the meningitis victims.

—————-

New in CORPORATE RAP SHEETS: Dossiers on the no-longer-merging military contracting and aerospace giants BAE Systems and EADS.

Dealing with a Rigged System

Bill Clinton may have stolen the show at the Democratic convention, but it was the speaker preceding him who had the more powerful message.

Declaring that “the system is rigged,” Elizabeth Warren delivered perhaps the most candid statement ever made at a mainstream U.S. political event about corporate domination of American life.

While both speeches were meant to make the case for the reelection of Barack Obama, they took two starkly different approaches that highlighted a tension within the Democratic Party as intense as the one between it and the Republicans.

Clinton, basking in the nostalgia many people feel for the relative prosperity of the 1990s, did a good job in contrasting the GOP’s ideology of “you’re on your own” to a Democratic philosophy of “we’re in this together.” His call for a shared prosperity was based on a vision of “business and government actually working together to promote growth.” He insisted that “advancing equal opportunity and economic empowerment is both morally right and good economics.”

While Clinton derided the Republican narrative that every successful person is completely self-made as an “alternative universe,” he is living in a fantasy world of his own. That’s one in which corporations that have pursued self-interested policies that put the economy on the brink of disaster and ravished the living standards of most of the population are suddenly going to get religion about economic justice.

Clinton captured the absurdity of the Republican argument against Obama’s re-election: “We left him a total mess. He hasn’t cleaned it up fast enough. So fire him and put us back in.” Yet the “we” in that statement actually includes more than George W. Bush and Republican members of Congress. The mess was caused primarily by the big banks, whose orgy of speculation was ushered in by the bipartisan financial deregulation of the Clinton era.

A more accurate rebuttal of the GOP’s bogus rugged individualism was provided by Warren: “Republicans say they don’t believe in government. Sure they do. They believe in government to help themselves and their powerful friends.” The Massachusetts senatorial candidate, refusing to kowtow to the sector that many Democrats turn to for campaign contributions, added: “Wall Street CEOs—the same ones who wrecked our economy and destroyed millions of jobs—still strut around Congress, no shame, demanding favors, and acting like we should thank them.”

Unlike Clinton, Warren acknowledged that contemporary big business is rife with corruption. She repeatedly depicted the economic system as being “rigged” and referred to the “rip-offs” perpetrated by the big banks. And in a rare linkage between conventional and corporate crime, she called for a society in which “no one can steal your purse on Main Street or your pension on Wall Street.”

This gets to the dilemma for Democrats. Do they ignore corporate crime, as Clinton chose to do, and make the far-fetched claim that government partnership with business will suddenly result in broad-based prosperity rather than widening inequality? If instead they follow Warren’s lead and highlight the venality of corporations, what kind of solution can they offer?

The Consumer Financial Protection Bureau championed by Warren is a good start. As Warren noted in her speech (without naming the culprit), the CFPB recently brought an enforcement action, the agency’s first, against Capital One for deceptive marketing of credit cards.

Yet the Obama Administration overall has shown little stomach for taking tough action against corporate criminals. Obama does not hesitate to talk about how bad things were when he took office, yet his Justice Department has done little to prosecute the banksters who created the crisis.

“President Obama believes in a level playing field,” Warren dutifully declared. “He believes in a country where everyone is held accountable.” But belief is not enough. If he is reelected, Obama will have to take on corporate misconduct and stonewalling on job creation in a much more aggressive way.

After Clinton finished his speech at the convention, Obama came out on stage to embrace him and share in the enthusiastic response of the audience. Yet in a second Obama term, he would do better to align himself with Warren’s call to show that “we don’t run this country for corporations, we run it for people.”

Regulators Draw Flak Meant for Corporate Perps

When a mobster or street criminal declares “I was framed” and expresses disdain for police and prosecutors, we dismiss it as part of their sociopathic tendencies. Yet when corporate transgressors do essentially the same thing by criticizing government regulators, they are taken much more seriously. All too often, business perps succeed in portraying themselves as the victims.

This charade is being played out yet again amid the current wave of scandals involving major U.S. and British banks. In the latest case, Britain’s Standard Chartered has been accused by New York State banking regulator Benjamin Lawsky of scheming with the Iranian government to launder billions of dollars in funds that might have been used to support terrorist activists.

Rather than being outraged by the fact a major financial institution may very well have provided substantial material support to a regime that the governments of the United States and other western countries spend so much time vilifying, most of the criticism seems to be aimed at Lawsky.

Some of this criticism, not surprisingly, is coming from Standard Chartered itself, which insists that 99.9 percent of its dealings with Iranian parties were legitimate and that it was already cooperating with other regulatory agencies in investigating the matter. Those other agencies, including the Federal Reserve and the Office of Foreign Assets Control, seem to be siding with Standard Chartered. An article in the New York Times served as a conduit for allegations by unnamed federal officials seeking that Lawsky’s case was seriously flawed.

The accusations against Standard Chartered are hardly unprecedented. Only two months ago, the Justice Department announced that the Netherlands-based ING Bank had agreed to pay $619 million to settle charges of having violated federal law by systematically concealing prohibited transactions with Iran and Cuba. Last month, the Senate Permanent Subcommittee on Investigations issued a report of more than 300 pages on the poor record of the British bank HSBC in avoiding money-laundering transactions linked to terrorism and drug dealing.

The unfriendly response to the Lawsky allegations is not just a matter of the usual tension between federal and New York State regulators when it comes to financial sector investigations. Disapproving comments have also come from officials in Britain, with one member of parliament making the ridiculous suggestion that anti-British bias was involved.

There’s something much larger at stake. We’re in the midst of an ongoing corporate crime wave, with major banks among the most prominent perpetrators. As the Times points out, large corporations are on track to pay as much as $8 billion this year to resolve allegations of defrauding the federal government, a record amount and more than twice the amount from last year.

We should be focusing our criticisms on the companies involved in these and other cases that have not yet reached the settlement stage—not the regulators and prosecutors trying to control the corporate misconduct.

If there is any criticism to be made of regulators, it is that too few of them resemble Lawsky. They are more likely to treat corporations with kid gloves, given that too many of them either come from the private sector or end up there after their stint in government. Or else they simply fail to take decisive action. In the other major financial scandal of the day—the manipulation of the LIBOR interest rate index by Barclays and other major banks—regulators such as the Federal Reserve Bank of New York knew of the abuses years ago and were slow to do anything. The inaction was brazenly used by former Barclays CEO Bob Diamond as a way of spreading the blame for the rate-rigging.

No discussion of regulation would be complete without mentioning the problem that many of the rules are too weak to begin with. The individual most responsible for this during the Obama Administration—Cass Sunstein—recently announced that he will be leaving the Office of Information and Regulatory Affairs to return to academia. An indication of the damage inflicted by Sunstein can be gauged by the fact that both the Business Roundtable and the U.S. Chamber of Commerce bemoaned his departure. Hopefully, Sunstein’s successor will make it harder for corporate malefactors to ply their trade.

How to Succeed in Business

It’s only a few months to the presidential election, and the economy is still a mess, yet the candidates have been arguing over the secret of success in business.

This is an old and tired debate, and neither side is saying anything novel. Romney is reciting the chamber of commerce fairy tale that business achievement is the result purely of hard work and risk-taking on the part of lone entrepreneurs. Obama mostly accepts that narrative but meekly points out that business owners also depend on government-provided infrastructure and thus should pay a slightly larger share of the taxes needed to fund those roads, bridges and the like.

Both men talk as if we were still in an early 19^th Century economy of small enterprises that live or die based on individual effort and minimal government activity—rather than the century-old reality that megacorporations are what dominate American commerce.

When the candidates do acknowledge the existence of big business, it is mainly to offer competing proposals on how to serve its needs. For the Republicans, this means further weakening of regulation and the dismantling of the corporate income tax. While the Democrats make some noise about controlling business excesses, nothing much comes of this, and their main goal seems to be that of bribing large corporations with incentives so they don’t abandon the U.S. economy entirely.

What both sides forget is that corporations exist at the behest of government—in nearly all cases state governments, which authorize their creation. The original ones were established to enlist private participation in government initiatives such as building canals. Before the Civil War, corporations were allowed to engage only in designated activities and could not grow beyond a certain size. It was to get around these limitations that robber barons such as Rockefeller created the trusts that came to control so much of American industry, prompting the passage of the Sherman Act and other antitrust efforts.

Whatever progress started to be made in thwarting the hyper-concentration of business was undermined when New Jersey and then Delaware rewrote their corporation laws to allow companies to do pretty much whatever they pleased and to become as big as they wished in the process. Eventually, other states followed suit. The corporate form, once a privilege granted for special purposes, became an entitlement for any pool of money seeking to make a profit behind the shield of limited liability.

What presidential candidates should be debating is whether the time has come to tighten state corporation laws or replace them entirely with a federal system of chartering, as Ralph Nader and his colleagues argued in the 1970s.

Nader’s effort was prompted by a wave of revelations about corporate misconduct that came out of the Watergate investigations. Today we have our own corporate crime wave: recent cases of foreign bribery (Wal-Mart), illegal marketing of prescription drugs (GlaxoSmithKline and others), manipulation of interest rates (Barclays) and pipeline negligence (Enbridge Energy) come on the heels of the Wall Street mortgage securities fiasco, the BP spill in the Gulf of Mexico, and the Massey Energy coal mining disaster.

If we have to talk about success in business, the question we should be considering is whether any large company succeeds without engaging in illegal, or at least unethical and exploitative, behavior. In spite of all the talk about corporate social responsibility, it is difficult to find a major firm that does not cross the line in one way or another.

Take the most successful company of recent years: Apple. Thanks to a series of investigative reports, we now know that Apple’s business achievements are based on a foundation of underpaid workers, both in its foreign factories and its domestic retail stores. On top of that, the company engages in flagrant tax avoidance, and despite its gargantuan profits, it forces state governments to hand over big subsidies when it builds data centers.

Sure, Apple made use of the type of public infrastructure President Obama likes to talk about. Yet the biggest benefit it and other large companies receive from government is the unwillingness to engage in serious regulation and to prosecute corporate crime to the fullest, which would mean an end to the current practice of deferred prosecutions and other forms of wrist-slapping.

Forget about roads and bridges: the real secret of business success is government tolerance of corporate misconduct.

Through A Corporate Glass, Darkly

Conventional wisdom has it that we live in an age of hyper-transparency. That’s true if you look at what people are willing to reveal about themselves to Facebook, but it’s another story for large corporations and the 1%.

The Republican filibuster of the DISCLOSE Act and Mitt Romney’s reluctance to release more of his income tax returns are strong reminders of how those at the top of the economic pyramid seek to hide the ways they accumulate their wealth and influence public policy.

The current preoccupation with disclosure issues makes this a good time to step back and review the state of corporate transparency. Do we know enough about the workings of the huge private institutions that dominate so much of modern life?

Of course, the answer is no. Yet the quantity and quality of disclosure vary greatly depending on the structure of a given company and the aspect of its operations one chooses to examine. Depending on which piece of the business elephant we touch, corporations may seen somewhat translucent or completely opaque.

It’s also worth remembering that there are two main forms of disclosure: information that companies, especially those whose stock is publicly traded, are compelled to reveal and the data that government agencies collect about firms and release to the public. What corporations release on their own initiative is, given its selective nature, self-serving spin rather than disclosure.

Most of what U.S. companies are required to disclose is contained in the financial filings required by the Securities and Exchange Commission. It’s great that the SEC makes these documents readily available via its EDGAR online system, but the information required from companies is meant to serve the needs of investors rather than those of us concerned with corporate accountability. There is thus an abundance of data on financial results and a meager amount on a company’s social impacts. Here’s a rundown and critique of disclosure practices regarding the latter.

LEGAL PROCEEDINGS. Each company filing a 10-K annual report has to include a section summarizing significant litigation and other legal proceedings in which it is involved. For some companies, these sections can go on for pages, which says a lot about the corporate tendency to run afoul of the law. Even so, these sections are often incomplete, since companies are given discretion in deciding which cases are “material,” meaning that fines and other penalties could have a significant impact on earnings. To get a fuller picture of corporate legal entanglements, you need to search the dockets on the PACER subscription service, which for large companies will be voluminous, or use the free summaries on the Justia website.

EXECUTIVE COMPENSATION. The annual proxy statements filed by publicly traded companies provide exhaustive details on the salaries, bonuses and other compensation received by top executives (and directors). Designated in the EDGAR system as Form DEF14A, these documents seem to try to drown the reader in details to downplay the impact of lavish pay packages. Note that what is called the Summary Compensation Table does not include essential information such as the amount (shown elsewhere) that an executive realized from the exercise of stock options.

EMPLOYMENT ISSUES. Companies are required to disclose their total number of employees but do not have to provide a geographical breakdown. Some do so voluntarily, but many others can hide the tendency to create many more jobs in foreign cheap-labor havens than at home. Because the penalties are usually small, companies tend not to disclose violations of federal rules regarding overtime pay, the minimum wage and other Fair Labor Standards Act issues. Fortunately, the Department of Labor has included wage and hour compliance information in its new enforcement website.

OCCUPATIONAL SAFETY AND HEALTH. Companies also rarely mention violations of occupational safety and health, for which penalties are also meager. The U.S. Occupational Safety and Health Administration, to its credit, makes available a database of all workplace inspection results going back to the creation of the agency; the DOL enforcement website provides access to this as well. Unfortunately, there are no summaries of the compliance records of large companies across their various establishments.

LABOR RELATIONS. Companies are required to report on labor relations issues only if there is a likelihood of a work stoppage that could affect corporate profits. With the decline of unions in the U.S. private sector, many companies do not bother to mention labor relations at all. Disputes that result in a formal ruling by the National Labor Relations Board will show up on that agency’s website.

ENVIRONMENTAL COMPLIANCE. Companies frequently discuss environmental regulation in the 10-K filings and will mention major enforcement actions. Yet these accounts are usually incomplete. The Environmental Protection Agency fills in the gaps with its Enforcement and Compliance History Online (ECHO) database.

TAXES. Buried in the notes to the company’s financial statements is a section with details on how much it paid (or in many cases did not pay) in the way of taxes. This information is presented with a high degree of obfuscation, so it is fortunate that Citizens for Tax Justice publishes reports that summarize the extent to which large U.S. companies engage in flagrant tax avoidance.

SUBSIDIES. Corporate filings usually say little or nothing about the subsidies received from government, and it is often impossible to learn from other sources what those amounts may be when it comes to subsidies that take the form of federal tax breaks. There is much more company-specific data available on subsidies from state governments. In my capacity as research director of Good Jobs First, I have collected that data and assembled it in the Subsidy Tracker database.

GOVERNMENT CONTRACTS. Companies will report on government contracts only if they make up a substantial portion of their total revenue. Thanks to the work of OMB Watch in creating the FedSpending database, which the federal government adapted for its USASpending tool, it is possible to learn a great deal about how much business a given firm is doing with Uncle Sam. Data on contracts with state governments can often, though not always, be found via state procurement websites.

LOBBYING AND POLITICAL SPENDING. Corporations are not eager to disclose their efforts to shape public policy, and the SEC does not require them to do so. The Center for Political Accountability, on the other hand, was created to put pressure on companies to be more open about their political spending. The group has succeeded in getting about 100 corporations to adopt political disclosure. The inadequate information that gets disclosed at the behest of the Federal Election Commission can be found on websites such as Open Secrets, while state-level electoral data is summarized on the Follow the Money site. Both also provide access to the available data on lobbying.

Inadequate political disclosure by corporations is not limited to the United States. A recent study by Transparency International on 105 of the world’s large companies found that only 26 engaged in satisfactory reporting of political contributions. That was just one component of an analysis that looks at a variety of transparency measures that relate broadly to anti-corruption initiatives. Some of the worst results concern the simple matter of whether firms provide full country-by-country data on their operations and financial results.

The latter shows how disclosure issues of concern to investors and financial analysts can intersect with those relating to corporate accountability. When a company is allowed to use excessive forms of aggregation in its reporting, it may be hiding either poor management or corporate misconduct or both.

Note: The information sources discussed above as well as many others are discussed in my guide to online corporate research.

The Permanent Corporate Crime Wave

For an issue that concerns a technical feature of global finance, the LIBOR scandal has had a surprisingly strong impact. There is speculation that banks could face tens of billions of dollars of damages in lawsuits that have been filed over their apparent manipulation of the interest rate index.

What makes the situation even more unusual is that the efforts by bankers to depress LIBOR not only worked to their benefit but also inadvertently helped millions of consumers by lowering rates on financial products such as adjustable-rate mortgages. Some individuals experienced lower returns from certain investments, but the big victims were municipal governments that were prevented from taking full advantage of the interest rate swaps many had purchased at the urging of Wall Street.

Apart from the direct financial impacts, the scandal has triggered a new crisis of confidence in major corporations and financial institutions. The New York Times just ran an article headlined The SPREADING SCOURGE OF CORPORATE CORRUPTION that poses the question: “Have corporations lost whatever ethical compass they once had?”

Citing academic research, the piece considers whether corporate wrongdoing may be cyclical or may be growing as a side effect of globalization. The article ends by bemoaning the damage to “Americans’ trust in the institutions that underpin the nation’s liberal market democracy.”

There is good reason for that trust to be eroding. The LIBOR controversy comes on the heels of a series of discomfiting revelations about the behavior not only of financial institutions but also that of other sectors of big business. For instance, GlaxoSmithKline recently had to pay a record $3 billion to settle charges of illegal marketing of prescription drugs. The federal Pipeline and Hazardous Materials Safety Administration just issued a scathing report on Enbridge Energy’s handling of a pipeline accident that spilled more than 800,000 gallons of oil in Michigan two years ago.

As troubling as this spate of cases may be, is it really anything new?

While the current scandals have been erupting, I’ve been reading a six-decade-old book that turns out to be surprisingly relevant. Edwin Sutherland’s White Collar Crime, published in 1949, was the first systematic assessment of the degree to which large corporations and those who work for them are inclined to break the law.

Defying the prevailing principles of criminology, which held that lawbreaking was a reflection of the personal and social pathologies of the lower classes, Sutherland marshaled a mountain of evidence to show that respected business executives regularly and unhesitatingly violated a wide range of civil and criminal statutes. His book focuses first on a sample of 70 large manufacturers and retailers and then on 15 major utility companies.

In his original manuscript, Sutherland identified companies in discussing their transgressions, but under pressure from a publisher worried about libel suits he removed the names. It was not until 1983 that an unexpurgated version of the book was issued.

Sutherland and his publisher had good reason to worry about corporate legal harassment. The book concludes that every one of the 85 companies was crooked one way or another. Using an expansive definition of criminality, Sutherland looks at both outright fraud and price-fixing as well as offenses such as securities violations, false advertising, food and drug adulteration, patent infringement, unfair labor practices and infringement of wartime price regulations.

The 70 manufacturers and retailers were found to have had a total of 980 offenses, or an average of 14 per company. The companies with the most were meatpackers Armour and Swift, with 50 each. As striking as all these numbers are, Sutherland argues that they probably do not reflect the full extent of misconduct, given the limitations of the information sources that were available to him and his researchers.

He concludes that the business world has a serious problem with recidivism: “None of the official procedures used on businessmen for violations of law have been very effective in rehabilitating them or in deterring other businessmen from similar behavior.” Sutherland also finds that many of the types of violations he examined were pervasive in various industries, and given that they often involved collaboration of people from different companies, they were the equivalent of organized crime.

Sutherland anticipates many of today’s discussions about corporate capture of regulatory agencies and the role of the revolving door between the public and private sectors in weakening government oversight of business. As is also the case today, he shows that “businessmen customarily feel and express contempt for law, for government, and for government personnel.” Whereas this view is now taken for granted, Sutherland regarded it as anti-social, saying it showed that in this respect corporate executives are “are similar to professional thieves, who feel contempt for law, policemen, prosecutors and judges.”

As new business scandals continue to surface, it’s important to retain a sense of outrage while also remembering that widespread corporate wrongdoing is nothing new and will not disappear anytime soon.

The Unlikley Regulator

Since the Citizens United ruling in January 2010, it has appeared that the U.S. Supreme Court was doing everything possible to increase the dominion of corporations. Yet in its astonishing ruling on the Affordable Care Act (ACA), the Court, among other things, affirms the right of the government to put far-reaching restrictions on one of the country’s most powerful industries.

Even more remarkable is that the majority decision was written by Chief Justice John Roberts, a former corporate lawyer thought to be firmly in the anti-regulatory camp.

What made the healthcare case so unusual is that, strictly speaking, none of the parties were overtly opposing the provisions of the ACA regulating the heinous practices of the private insurance industry, such as discriminatory pricing, denial of coverage to those with “pre-existing conditions” and cancellation of coverage after a subscriber gets seriously ill. Both the oral arguments and the written opinions were filled with pro-regulation comments by normally laissez-faire-minded Justices.

Opponents of the law chose instead to focus their attack on the constitutionality of the individual mandate, which was at the heart of the deal the Obama Administration and Congressional Democrats made with the insurance industry under which the companies agreed not to fight the regulations in exchange for which they were guaranteed millions of new compulsory customers paying subsidized premiums.

Thanks to the defection of the Chief Justice based on a narrow interpretation of the mandate, the stratagem of the anti-healthcare reform camp turned out to be a colossal miscalculation. It also looks like the insurance companies have been snookered about the extent to which they will benefit from the law.

It will be of some consolation to conservatives that the Roberts opinion contains a strident rejection of the idea that Congress was justified in imposing the individual mandate through its constitutional power to regulate interstate commerce. The Chief Justice devotes many pages of his decision to a recitation of the argument that the mandate was in this sense an overreach, in the course of which he even reprises the broccoli analogy used by Justice Scalia during the hearings on the case.

Yet he then pivots and embraces, along with the Court’s four liberal justices, the secondary argument that the mandate was justified as an exercise of the taxing power of Congress, the tax being the financial penalties contained in the ACA for those without coverage who refuse to purchase individual policies.

What’s interesting is that in order to depict the penalties as a legitimate tax, Roberts has to argue that they are not overly punitive. In doing so, he writes that “for most Americans the amount due will be far less than the price of insurance, and, by statute, it can never be more. It may often be a reasonable financial decision to make the payment rather than purchase insurance.”

Roberts is thus highlighting one of the rarely discussed features of the ACA’s individual mandate: the penalties for disobeying it are far from draconian. Overheated rhetoric by the Right notwithstanding, no one will ever be thrown in jail for not having health coverage, nor will the penalties drive anyone into penury. In fact, it is not clear that the requirement will ever be enforced to any significant extent.

Moreover, any penalties that are collected will go to the Treasury, not to the private insurers missing out on premium payments from scofflaws. If enough of the defiantly uninsured realize the relatively low risks of non-compliance, the individual mandate may not create as many new customers as the insurance industry had hoped.

Of course, the ACA will create new customers from among the ranks of the uninsured who want coverage but have not been able to afford it without the subsidies the law will create. But many of these will be families who will make significant use of the coverage, as opposed to the young invincibles who never go to the doctor. In other words, the industry will end up with more of the less profitable end of the market.

Reading the Roberts opinion, one gets the impression that he was grasping for a way to uphold the ACA and rise above the unalloyed conservative partisanship that has tainted the recent history of the Court. While history may look kindly on his decision, in the shorter term he is bound to become a whipping boy for disappointed opponents of healthcare reform. Back in the 1960s rightwing fringe groups campaigned to have then-Chief Justice Earl Warren impeached for his supposedly pro-Communist rulings. Calls to “Impeach John Roberts” are already emerging from Red State America.

Whatever the Roberts legacy turns out to be, the bigger question is what will become of the U.S. healthcare system. It is encouraging that the most egregious insurance company behavior will be outlawed, but who knows what other tricks the industry will devise to torment its customers. The uproar over the ACA does not change the fact that the only real solution is to take the profit out of health coverage.