Month: May 2015

Punishments that Fit the Corporate Crime

gm-ignition-switch-accident-victims_0Now that several large banks have pled guilty to criminal charges, the next addition to the list of corporate felons could be General Motors, which is reportedly negotiating a settlement with the Justice Department to resolve an investigation of the company’s concealment of an ignition-switch problem that has been linked to more than 100 deaths.

Another criminal investigation is targeting Takata Corp., whose defective airbags recently prompted the record recall of 34 million vehicles. Its airbags can explode violently when activated, shooting shrapnel that has been tied to six deaths and more than 100 injuries.

In reporting the possibility of a plea by GM, the New York Times said the company is likely to be hit with a record financial penalty, suggesting that this will be the main punishment faced by the automaker. Presumably, Takata will also have to fork over a substantial sum.

Federal prosecutors have been extracting larger and larger amounts from companies in settlement deals, but are monetary penalties enough when it comes to corporate misconduct that results in serious physical injuries and loss of life?

Of course, there is a long tradition in the tort system of attaching dollar amounts to victims of business negligence, but when the wrongdoing is serious enough to warrant criminal charges, the culprits should not be able to buy their way out of jeopardy.

Ideally, such cases should also include the filing of charges against individuals, especially top executives, who could face the loss of their personal liberty. In most instances, however, prosecutors say it is too difficult to prove individual culpability.

How, then, could companies be punished beyond financial penalties (which are often easily affordable and tax deductible)? Short of using the corporate death penalty (charter revocation), which in the case of a large firm such as GM would cause economic upheaval, there are other options to consider.

It’s frequently said that corporations cannot be put in prison, but there are ways of restricting their freedom to operate. These involve excluding them from certain markets or putting restrictions on the scope or size of their business. Such penalties already exist in the form of debarment from federal contracting or disqualification from certain regulated activities.

The problem is that prosecutors and regulators are wary of making full use of these sanctions, as seen in the fact that the banks that recently pleaded guilty to criminal charges of rigging the foreign currency market were promptly given waivers by the SEC from rules that would have disqualified them from the securities industry.

Perhaps the bank offenses were too abstract to engender much public anger over the way they were allowed to escape some of the more serious consequences for their crimes. But I’d like to think that companies found to have caused death and dismemberment will be expected to do more than write a check.

Convictions Without Consequences

get_out_of_jail_freeIn the years following the financial meltdown, corporate critics complained that the big banks were not facing serious legal consequences for their misconduct. They were being allowed to essentially buy their way out of jeopardy through financial settlements under which they admitted no wrongdoing.

In 2012 the Justice Department gave in to the pressure and extracted a guilty plea, but it was made by an obscure subsidiary of a foreign bank, Switzerland’s UBS, to resolve a charge of felony wire fraud in connection with the long-running manipulation of LIBOR benchmark interest rates. The plea seemed to do little to impede UBS’s operations. The bank dodged one serious consequence when it received an exemption from the Labor Department from a rule that should have disqualified it from continuing to serve as an investment advisor for pension funds.

Things would be different, critics said, when a criminal conviction involved a parent company. Last year, that happened when another Swiss bank, Credit Suisse, pleaded guilty to conspiracy charges of assisting U.S. taxpayers in dodging taxes by filing false returns with the Internal Revenue Service. Subsequently, Credit Suisse applied for its own exemption from the Labor Department; a decision is pending but is likely to go in the bank’s favor.

Now, at last, the Justice Department has gotten major two major U.S. banks — Citicorp and JPMorgan Chase — to plead guilty to something, which turned out to be felony charges of conspiring to manipulate foreign exchange markets. Two foreign banks — Barclays and Royal Bank of Scotland — also agreed to guilty pleas in the case.

The four financial institutions will together pay criminal fines of just over $2.5 billion. Additional fines were assessed by their regulator, the Federal Reserve.

It’s not clear they will suffer much more than those easily affordable financial penalties. Along with likely exemptions from the Labor Department, the banks have already been granted waivers from SEC rules barring criminals from engaging in the securities business. The banks will be on probation for three years, but keep in mind that BP was on probation at the time of the Gulf of Mexico disaster.

A somewhat higher hurdle may be faced by UBS, which the Justice Department announced has entered a new guilty plea (this time by the parent company) after being found to be in breach of the 2012 non-prosecution agreement it signed when the Japanese subsidiary pleaded guilty.

While newly designated criminals such as Citibank and JPMorgan can claim they will never break the law again, UBS is already found to have violated its commitment to be law-abiding by participating in the foreign exchange conspiracy and engaging in other forms of misconduct.

Taken together, all these developments illustrate the farce that is law enforcement when large corporations are involved. For years they were freed from serious consequences through the use of deferred- and non-prosecution agreements. The size of the financial settlements they had to pay rose into the billions, but these were still affordable costs of doing business.

Now corporations are starting to plead guilty to felony charges, but the practical implications of those convictions are being undermined by regulatory agencies. Having a criminal record is not pleasing to corporations, but if they can continue to do business as usual, they will learn to live with that stigma.

When street crime was on the rise a few decades ago, public officials fell over themselves to enact harsh punishments. Now is the time for a serious discussion of how to get tough on crime in the suites.

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New in Corporate Rap Sheets: Peabody Energy. The “Exxon of Coal” fights CO2 regulation and pushes climate denial.

Shelling the Alaskan Coast

shellPresident Obama has taken pride in his “all of the above” energy philosophy, but it now seems that approach is so inclusive that it will allow a company with a horrendous safety record to proceed with plans to drill for oil in the treacherous Arctic waters of the Chukchi Sea off the coast of Alaska. Is it necessary to run the risk of another Exxon Valdez or Deepwater Horizon disaster just to prove that you’re not hostile to fossil fuels?

Abigail Ross Hopper, director of the Interior Department’s Bureau of Ocean Energy Management (BOEM) said the decision to give Royal Dutch Shell a green light came after the agency took “a thoughtful approach to carefully considering potential exploration in the Chukchi Sea.” Yet what has really changed in the two years since Interior Secretary Ken Salazar said “Shell screwed up in 2012” in announcing that approval for the Arctic drilling was being withheld until the company cleaned up its act? The new permit is not final but it gives unwarranted momentum to Shell’s plan.

There are many reasons why the decision is a mistake, but they all come down to Shell’s less than sterling credibility and its tarnished track record.

Shell has had a troubled relationship with the truth at least since 2004, when it admitted overstating its proven oil and natural gas reserves by 20 percent. This prompted an investigation by the U.S. Securities and Exchange Commission and a decision by the twin boards of the company to oust chairman Philip Watts, who was replaced by Jeroen van der Veer. It later came out that top executives, including van der Veer, knew of the deception about the reserves back in 2002. The company ended up paying penalties of about $150 million to U.S. and British authorities.

In 2008 there were reports that Shell manipulated a supposedly independent environmental audit of a huge Russian oil and gas project in which it was involved to influence financial institutions considering funding for the $22 billion project.

That same year, reports released by the Inspector General of the U.S. Department of the Interior listed Shell as one of the companies that made improper gifts to government employees overseeing offshore oil drilling. The agency involved was the Minerals Management Service, which was dismantled as a result of the scandal and replaced by two entities, including the BOEM.

In 2011 a Shell pipeline off the coast of Scotland leaked some 1,300 barrels of oil in the worst North Sea oil spill in a decade.

The 2012 screw-up to which Salazar was referring included problems in the same area it wants to drill. In one incident a spill containment system failed during testing; later, a drilling rig owned by Shell broke loose from a tug that was pulling it to a maintenance facility and crashed into an uninhabited island off the Alaskan coast.

The company is even more notorious for its operations in Nigeria, which were marked by numerous pipeline ruptures and other environmental damage caused by practices such as extensive gas flaring. Ken Saro-Wiwa, a leading critic of the company, was hanged by the Nigerian military in 1995. Shell was widely blamed for propping up the regime, while a 2011 United Nations report estimated that an environmental cleanup of the area around Shell’s operations would cost $1 billion and take 30 years.

Shell’s environmental policy states: “Our approach to sustainability starts with running a safe, efficient, responsible and profitable business.” They’ve got the profitable part covered, but the rest is another matter.

Hiding Hazards

blindersWhen Stanley Works and Black & Decker announced merger plans in late 2009, the two firms made sure to describe themselves as producers of quality tools while claiming that their marriage would produce “significant cost synergies.” More than five years later, the combined company, Stanley Black & Decker, seems to be making progress on costs (and profits), but new revelations put into question its commitment to quality.

The federal Consumer Product Safety Commission and the Justice Department recently announced that the firm’s Black & Decker unit would pay $1.575 million to settle allegations that it “knowingly violated federal reporting requirements with respect to cordless electric lawnmowers that started spontaneously and that continued to operate after consumers released the lawnmower handles and remove the safety keys.” In other words, Black & Decker has been selling products with uncontrollable spinning blades.

While CPSC press releases are normally neutral in tone, the statement on Black & Decker was unusually harsh. Agency chairman Elliott Kaye was quoted as saying: “Black & Decker’s persistent inability to follow these vital product safety reporting laws calls into question their commitment to the safety of their customers.”

What had apparently ticked off Kaye was that this was the fifth time the commission had cited Black & Decker for reporting violations. The previous case was in 2011, when the company had to pay $960,000 to settle allegations that it failed to report a defect in one of its Grasshog trimmer/edgers that could cause parts to loosen and become projectiles.

Most CPSC civil penalties are brought against companies that fail to report defects and accidents in a timely manner: “That means within 24 hours, not months or years as in Black & Decker’s case,” Kaye stated with obvious annoyance. Assistant Attorney General Benjamin Mizer was also blunt: “Not for the first time, Black & Decker held back critical information from the public about the safety of one of its products.” The company was said to have received more than 100 consumer complaints and accident reports from lawnmower customers over a period of years before it decided to share the information and recall the products.

Black & Decker is not the only large “quality” manufacturer that has been accused of essentially covering up dangerous defects in its products. Earlier this year, General Electric had to pay the CPSC $3.5 million — one of the largest civil penalties in the commission’s history — to settle allegations that it failed to report “an unreasonable risk of serious injury” relating to some of its ranges containing connectors that could overheat and cause fires.

Large companies these days profess to be committed to transparency and accountability, but some are still inclined to hide their dirty (and dangerous) secrets.

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New in Corporate Rap Sheets: Barrick Gold and its environmental and human rights controversies on five continents.