June 2016 Archives

The Amazing Variety of Bank Misconduct

Since the beginning of 2010 major U.S. and foreign-based banks have paid more than $160 billion in penalties (fines and settlements) to resolve cases brought against them by the Justice Department and federal regulatory agencies. Bank of America alone accounts for $56 billion of the total and JPMorgan Chase another $28 billion. Fourteen banks have each accumulated penalty amounts in excess of $1 billion, and five of those are in excess of $10 billion.

These are among the key findings revealed by Violation Tracker 2.0, the second iteration of an online database produced by the Corporate Research Project of Good Jobs First. The database, which initially focused on environmental and safety cases, has now been expanded to include a wide variety of offenses relating to the financial sector along with cases against companies of all kinds involving price-fixing, defrauding of consumers and foreign bribery. Banks and other financial companies account for about half of the new cases but more than 90 percent of the penalties.

With the expansion Violation Tracker now covers 110,000 cases from 27 regulatory agencies and the DOJ with total penalties of some $270 billion.

Along with the new database, we are releasing a report called The $160 Billion Bank Fee that focuses on a subset of the data: mega-cases — those with penalties of $100 million or more — brought against major banks by the Justice Department and agencies such as the Consumer Financial Protection Bureau, the Federal Reserve, the Office of the Comptroller of the Currency and the Securities and Exchange Commission. Private litigation is not included.

We found 144 of these mega-cases that had been brought against 26 large U.S. and foreign banks. Along with Bank of America and JPMorgan Chase, those banks with $10 billion or more in penalties include: Citigroup ($15.4 billion), Wells Fargo ($10.9 billion), and Paris-based BNP Paribas ($10.5 billion).

Many of the mega-cases address the toxic securities and mortgage abuses that gave rise to the 2008-2009 financial meltdown but there are also numerous other offenses that have received less attention. The cases and penalties break down as follows:

Toxic securities and mortgage abuses: $118 billion
Violations of rules prohibiting business with enemy countries: $15 billion
Manipulation of foreign exchange markets; $7 billion
Manipulation of interest rates: $5 billion
Assisting tax evasion: $2.4 billion
Credit card abuses: $2.2 billion
Failure to report suspicious behavior by Bernard Madoff: $2.2 billion
Inadequate money-laundering controls: $1.3 billion
Discriminatory practices: $939 million
Manipulation of energy markets: $898 million
Other major cases: $3.8 billion
TOTAL: $160 billion

Of the 144 mega-cases, 120 were brought solely as civil matters. The other 24 involve criminal charges, though in two-thirds of those cases the banks were able to avoid prosecution. The latter include 10 cases with deferred prosecution agreements and six with non-prosecution agreements. The banks that have pleaded guilty to criminal charges include: Citigroup, JPMorgan Chase, Barclays, BNP Paribas, Credit Suisse and Royal Bank of Scotland.

While these cases serve to illustrate the magnitude and amazing variety of bank misconduct, it remains to be seen whether they have succeeded in their intended purpose: to get the banks to clean up their act.

The Lax Prosecution of Corporate Crime

When an individual commits a serious offense, chances are that he or she is going to face a criminal charge. When a corporation breaks the law in a significant way, in most cases it faces a civil penalty.

This disparity between the treatment of human persons and corporate ones became increasingly apparent to me as I finished processing the data for the expansion of the Violation Tracker database my colleagues and I at the Corporate Research Project of Good Jobs First are releasing on June 28.

Violation Tracker 2.0 adds data on some 700 cases involving banks and other financial services companies brought by the Justice Department and ten federal regulatory agencies as well as 600 involving non-financial firms in areas such as price-fixing and foreign bribery. These 1,300 cases account for well over $100 billion in fines and settlements.

These plus the environmental, safety and health cases that made up the initial version of Violation Tracker bring the total number of entries in the database to 110,000 for the period since the beginning of 2010. Of that number, only 473 — less than one half of one percent — involve criminal charges.

It may come as a surprise that the largest portion of the criminal cases involve serious environmental matters referred to the Justice Department by the Environmental Protection Agency and a few from agencies such as the Coast Guard. The largest of these was a $400 million settlement with Transocean in connection with the Deepwater Horizon disaster in the Gulf of Mexico but most have penalties below $1 million.

The next most common category is price-fixing, with 99 cases that imposed penalties ranging up to the $500 million paid by the Taiwanese company AU Optronics. There are 82 tax cases, most of which involve charges against Swiss banks for helping U.S. taxpayers keep their offshore accounts hidden from the IRS. Foreign Corrupt Practices Act cases brought by the Justice Department account for 53 cases, with the biggest penalty, $772 million, paid by the French company Alstom.

Other categories include serious food safety violations, market manipulation and failure to adhere to rules against doing business with countries deemed to be enemies of the United States.

The significance of the 473 cases is diminished by the fact that in 35 percent of them the companies weren’t really prosecuted. Instead, they paid a penalty and signed either a non-prosecution agreement or a deferred prosecution agreement. These are gimmicks that allow companies to avoid the consequences of a criminal conviction.

Of the 308 cases in which there was an actual guilty plea or verdict, 161 were environmental matters, many of which were brought against small companies for things such as toxic dumping. Relatively few large corporations were targeted.

The category with the largest number of big business convictions is price-fixing, which in recent times has often meant Asian automotive parts companies. Seven big U.S. and foreign banks (or their subsidiaries) have had to enter guilty pleas. In just two cases did U.S. bank parent companies — Citigroup and JPMorgan Chase — enter those pleas. These were in a case involving manipulation of the foreign exchange market. After their pleas, they and the foreign banks also charged got waivers from SEC rules that bar firms with felony convictions from operating in the securities business.

So here’s what it comes down to: Apart from when they engage in price-fixing, large corporations rarely face criminal charges. When they do, they are often allowed to settle without a formal prosecution. And when they do plead guilty, these can get waivers from the consequences of their conviction.

Keep this in mind the next time a corporate lobbyist complains about excessive regulation.

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Note: Violation Tracker 2.0 will be released on June 28.

The Ongoing Business Watergate Scandal

It is often forgotten that the Watergate scandal of the 1970s was not only about the misdeeds of the Nixon Administration. Investigations by the Senate and the Watergate Special Prosecutor forced companies such as 3M, American Airlines and Goodyear Tire & Rubber to admit that they or their executives had made illegal contributions to the infamous Committee to Re-Elect the President.

Subsequent inquiries into illegal payments of all kinds led to revelations that companies such as Lockheed, Northrop and Gulf Oil had engaged in widespread foreign bribery. Under pressure from the SEC, more than 150 publicly traded companies admitted that they had been involved in questionable overseas payments or outright bribes to obtain contracts from foreign governments. A 1976 tally by the Council on Economic Priorities found that more than $300 million in such payments had been disclosed in what some were calling “the Business Watergate.”

While some observers insisted that a certain amount of baksheesh was necessary to making deals in many parts of the world, Congress responded to the revelations by enacting the Foreign Corrupt Practices Act in 1977, making bribery of foreign government officials a criminal offense under U.S. law.

That laws is still on the books, and despite all the talk of corporate social responsibility, quite a few corporations still get caught in its net.

As part of the forthcoming expansion of the Violation Tracker database I produce with my colleagues at the Corporate Research Project of Good Jobs First, I’ve been looking at recent FCPA data and have been struck by the enduring inclination of businesspeople to engage in foreign bribery.

Since the beginning of 2010 about 90 companies have been hit with either criminal charges brought by the Justice Department or civil charges filed by the SEC or both. The 53 companies charged by the DOJ had to pay nearly $4 billion to settle their cases, while the 72 firms targeted by the SEC had to pay $1.7 billion.

The companies involved in the cases include some very familiar U.S. corporate names, including: Alcoa, General Electric, Goodyear, Johnson & Johnson, Pfizer, Ralph Lauren and Smith & Wesson.

Yet some of the biggest penalties have been paid by foreign companies such as the French conglomerate Alstom ($772 million), British military contractor BAE Systems ($400 million), Italian petroleum company ENI ($125 million) and German automaker Daimler ($91 million).

That reflects the long reach of the law, which allows for cases to be brought against foreign corporations involving corrupt practices in third countries. For example, the Japanese trading company Marubeni was charged with paying bribes to high-ranking government officials in Indonesia to secure a lucrative power project. Germany’s Deutsche Telekom and its Hungarian subsidiary Magyar Telecom were charged with making illegal payments in Macedonia and Montenegro.

From the time the FCPA was enacted, corporate lobbyists have complained about the law and have sought to have it weakened or repealed. The smarter companies have realized that the bribery rules are not going away and that they simply need to clean up their act when doing business abroad.

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Note: Violation Tracker 2.0 — which will add banking offenses and cases involving price-fixing, money laundering, defrauding of consumers and export-control/sanctions violations as well as foreign bribery — will be released on June 28.

The (Price) Fix is In

Conventional economists and the policymakers who follow their advice continue to insist that the market is an inevitable force to which we must all pay homage. Belief in the power of the “invisible hand” is used to justify all manner of conservative policies, including resistance to living wage ordinances.

Yet there is plenty of evidence that influences other than supply and demand play a role in commercial activity, even when government is not involved. A key example concerns the setting of prices, which is supposedly the purest of free market activities but is frequently the result of collusion among supposed competitors.

Anyone who read Adam Smith in college may have been exposed to his observation that “people of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or some contrivance to raise prices.”

I was reminded of the enduring truth of that statement in the course of gathering data for the forthcoming expansion of the Violation Tracker database I oversee as part of my work for the Corporate Research Project of Good Jobs First. The bulk of that expansion will cover the many sins of the banking sector, but it will also include other commercial offenses such as price-fixing.

Since the beginning of 2010, the Antitrust Division of the Justice Department has resolved price-fixing cases against more than 80 companies. This is one of the few areas in which corporations routinely face criminal charges and usually have to enter guilty pleas rather than getting off with a deferred-prosecution or non-prosecution agreement.

Those 83 companies have had to pay a total of more than $4 billion in fines, with the individual amounts ranging as high as $500 million in the case of Taiwanese electronics company AU Optronics, which pleaded guilty to fixing prices of LCD displays used in computers and televisions in the United States. A federal jury found that the company conspired with its competitors during monthly meetings secretly held in hotel conference rooms, karaoke bars and tea rooms around Taiwan.

AU Optronics is one of five Taiwanese companies that have faced U.S. price-fixing charges in recent years, but the largest number of defendants in these cases come from Japan. Forty-nine Japanese companies have paid a total of $2.8 billion in penalties. Adding in the two defendants from South Korea and one from Singapore, Asian companies accounted for more than two-thirds of the cases and three-quarters of the penalties.

Price-fixing, however, is not an exclusively Asian proclivity. The list of defendants include 14 U.S. companies, seven from Germany, two from Switzerland and one each from Bermuda, Chile and Sweden.

The industry that has dominated U.S. price-fixing prosecutions in recent years is auto parts, which accounts for 42 defendants that have paid some $2.6 billion in penalties. More defendants come from the freight industry but the average penalties have been lower, totaling $449 million. The electronic components sector accounts for $583 million, mainly as a result of AU Optronics.

While many of the culprits are lesser known manufacturing and service companies, the list also includes corporations familiar to consumers. Among these are Bridgestone, Panasonic and Samsung.

Keep these cases in mind the next time someone insists that the market is sacrosanct

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Note: Violation Tracker 2.0 — which will add banking offenses, money-laundering, defrauding of consumers, foreign bribery and export-control/sanctions violations as well as price-fixing — is scheduled to be released on June 28.

Trump and the National Enquirer’s Mutual Admiration Society

Donald Trump’s verbal assault on reporters who dared to ask question about his charitable activities displays a contempt for the media comparable to that of Richard Nixon and Spiro Agnew. Yet there is one media outlet for which the presumptive Republican nominee seems to have unbounded affection: the National Enquirer.

Much has been written about Trump’s fascination with the supermarket tabloid, usually with the assumption that it is simply an indication of low-brow reading habits. Yet there is more to Trump’s relationship with the current and former principals at the Enquirer that bears closer scrutiny.

Trump is apparently close with David Pecker, chief executive of American Media Inc., parent of the Enquirer and other tabloids. In 2010 New York’s Pace University announced that it would pay tribute to Pecker (an alumnus) and that the award would be presented by Trump, “a long-time friend and business associate.”

Last August, the New York Daily News, also noting the relationship between the two men, reported that the Enquirer had decided not to subject Trump to the kind of sensationalized reporting that it had used in the past to sink the presidential ambitions of John Edwards and Gary Hart. In fact, the Enquirer has published self-aggrandizing pieces written by Trump, attacked his Republican opponents and formally endorsed Trump, apparently the first time the tabloid has done so for a candidate.

American Media gained control of the Enquirer after the 1988 death of Generoso Pope Jr., who had purchased the publication in the early 1950s. The Enquirer had been founded in 1926 by William Griffin, a protege of William Randolph Hearst who shared the media baron’s isolationist views. Griffin was so outspoken in opposing U.S. involvement in World War II that he was among a group of people indicted in the 1940s for sedition and conspiring to impair the morale and loyalty of the armed forces. The charges against him were later dropped.

The Enquirer was struggling to survive when Pope acquired it, reportedly with the financial assistance of mobster Frank Costello, who was apparently close to Pope’s father, also named Generoso. The elder Pope was a political powerbroker in the Italian-American community as the publisher of the rightwing Italian-language newspaper Il Progresso. Until 1941 he was a supporter of Mussolini.

Along with his publishing enterprises, the elder Pope controlled Colonial Sand & Stone, which became the dominant ready-mix concrete provider in New York City. After his death, both Il Progresso and Colonial were taken over by his oldest son, Fortune Pope. Colonial retained its grip on New York’s construction industry until the 1970s and in all likelihood did business with Donald Trump’s father Fred and perhaps Donald himself during the early years of his career.

Meanwhile, Fortune’s eccentric brother Generoso turned the Enquirer into a thriving operation with a mix of sensationalism and scandal. It was not until American Media took it over that the publication began to dabble in political reporting and politics. Back in 1999, when Trump was considering his presidential bid, via the Reform Party, the Enquirer published a poll purportedly showing that the real estate developer would be a strong candidate. Trump, naturally, cited the poll in justifying his plans.

It is difficult to tell whether Pecker, who has made campaign contributions to prominent Democrats as well as Republicans, has been promoting Trump for ideological reasons or just because the colorful real estate developer and former reality TV star helps sell his publications. Pecker’s company used to publish Reality Weekly, which featured Trump during his “Apprentice” days. Earlier in his career, while at Hachette, Pecker published an in-house magazine called Trump Style that was distributed to visitors at Trump properties.

While the relationship between Pecker and Trump may have once been little more than matter of cross-marketing, its role in the current presidential race is a lot more troubling.