June 2024 Archives

Reprehensible Corporate Behavior

Government officials are usually restrained in the way they talk about corporate behavior, even when a company is involved in a scandal. But Jennifer Homendy, chair of the National Transportation Safety Board, let loose against Norfolk Southern in a meeting about last year’s derailment and hazardous substances release in East Palestine, Ohio.

Homendy charged that the rail carrier “delayed or failed to provide critical investigative information to our team,” forcing her to have to threaten to issue subpoenas to compel disclosure. She described the company’s actions as “unconscionable” and “reprehensible.”

Homendy listed a series of company actions taken during the investigation she called unethical or inappropriate, including Norfolk Southern’s decision to retain a private company to conduct testing of vinyl chloride for inclusion in the NTSB record. Parties “are not permitted to manufacture their own evidence and develop their own set of facts outside of the NTSB investigative process, which is exactly what Norfolk Southern did,” Homendy said.

On top of that, Homendy said that a Norfolk Southern executive recently delivered what she and other NTSB employees interpreted as “a threat” by pressing the agency to dampen speculation about whether the company was responsible for the decision to incinerate toxic materials at the site of the derailment, a process known as vent and burn.

Those remarks came as the safety agency issued an abstract of a report on the incident in which Norfolk Southern is alleged to have “compromised the integrity of the decision to vent and burn the tank cars by not communicating expertise and dissenting opinions to the incident commander making the final decision. This failure to communicate completely and accurately with the incident commander was unjustified.”

The incineration of those toxic substances forced widespread evacuations, and even after people returned to their homes there have been lingering concerns about the potential long-term health impacts from the smoke that covered East Palestine.

It will be interesting to see whether the NTSB chair’s skewering of Norfolk Southern prompts Congress to take action on railroad safety. As documented in Violation Tracker, the Class I railroads have been fined thousands of times by the Federal Railroad Administration. Norfolk Southern was targeted more than 1,600 times by the FRA.

Yet most of these cases involve relatively minor matters. When it comes to major issues, the FRA has shown itself to be pretty ineffective. That varies somewhat from one presidential administration to another, but the industry has managed to avoid major reforms.

In fact, it has been brazen in pushing for changes that would enhance profits but increase the risk of derailments and other accidents. This is the industry, after all, which thinks it is okay to operate trains stretching for a mile or more with just one human being on board. There is even growing use of trains that are entirely remote-controlled—a practice that has already led to a rash of accidents.

Railroads have been flexing their corporate muscles since the mid-19^th Century. It is time to subject them to some serious oversight.

Nothing to Be Proud Of

Seated in a hearing room between hostile Senators and relatives of the victims of 737 Max crashes calling for criminal prosecutions, Boeing CEO David Calhoun tried to have it both ways. He apologized to the families and admitted that the company has to work hard to regain the public’s trust, but he avoided taking personal responsibility and sought to preserve some remnant of Boeing’s reputation.

“I’m proud of every action we have taken,” he declared, eliciting an incredulous response from Sen. Josh Hawley, who accused Calhoun of cutting corners on safety to maximize profits: “You are strip-mining Boeing.” Connecticut Sen. Richard Blumenthal called the hearing “a moment of reckoning” for a “a once iconic company that somehow lost its way.”

These comments and others designed to put Calhoun on the defensive imply that Boeing was a model company before the 737 Max debacle. In fact, the company has been the subject of safety concerns for several decades.

For example, after a Japan Air Lines 747 crashed during a domestic flight in 1985, killing 520 people, Boeing admitted that it had performed faulty repairs on the plane’s rear safety bulkhead.

In 1989 the U.S. Federal Aviation Administration ordered inspections of engine monitoring and fire alarm systems on more than 700 Boeing 737s—all of those built since the end of 1980—after one of those jets crashed in Britain as a result of malfunctions in two engines.

In 1994 the Seattle Times, after reviewing 20 years of reports submitted to the FAA, concluded that more than 2,700 Boeing 737s then in service were flying with a defective part that could cause the plane’s rudder to move unpredictably, possibly turning the aircraft in the opposite direction being steered by the pilot.

In 1999 the FAA proposed a penalty of $392,000 against Boeing for failing to notify regulators of a safety defect in the fuel valves of its 757 jets.

In 2002 the FAA ordered U.S. airlines to inspect more than 1,400 planes manufactured by Boeing see if they were equipped with an improperly wired fuel pump that could cause an explosion in the rare event that fuel went below minimal levels.

In 2012 the FAA proposed a civil penalty of $13.57 million against Boeing for failing to meet a deadline to submit service instructions that would enable airlines to reduce the risk of fuel tank explosion on its 747 and 757 jets.

In 2013, after several incidents in which lithium-ion batteries in 787s caught fire, the FAA ordered the grounding of all U.S.-based Dreamliners. A federal official accused the company of having submitted flawed safety test results on the batteries.

Boeing has also been accused of doing faulty work in its military contracts. For example, in 2000, the company agreed to pay up to $54 million to resolve two whistleblower lawsuits charging that the company placed defective gears in CH-47D Chinook helicopters and then sold the aircraft to the U.S. Army.

In 2009 Boeing agreed to pay $25 million to settle allegations that it performed defective work on the entire KC-10 Extender fleet, a mainstay of the Air Force’s aerial refueling fleet used in Iraq and Afghanistan.

Boeing had a glorious history from the 1920s, when it pioneered the aviation industry, through the 1940s, when its bombers helped win the Second World War, and into the postwar era, when it played a major role in bringing about the jet age and mass airline travel.

The company’s record in recent decades has been much less impressive. The 737 Max scandal is not an anomaly, but rather the culmination of a long-term decline that is nothing to be proud of.

A 17-Year Quest for Accountability

The phrase banana republic was coined in the early 20^th Century to describe countries dominated by large corporations which operated plantations marked by the ruthless exploitation of their workers. Perhaps the most notorious of those companies was United Fruit, which used both its economic power and the might of the U.S. military to rule much of Central America. The latter was seen clearly in the 1954 ouster of the populist Arbenz government in Guatemala in a coup engineered by the CIA.

United Fruit later changed its name to United Brands and then to Chiquita Brands International, but its behavior did not cease to be scandalous. In the 1970s, for instance, it was revealed to have paid a large bribe paid to the president of Honduras.

Another major controversy with its origins in the 1990s has tainted the company for three decades, culminating in a recent jury verdict against Chiquita in a federal civil lawsuit in Florida. That controversy stemmed from the company’s decision to make payments to a rightwing paramilitary group in Colombia, supposedly to protect its personnel and operations in the country. Chiquita continued to bankroll the group, the United Self-Defense Forces of Columbia (known by its Spanish initials AUC), even after it was designated as a Foreign Terrorist Organization by the U.S. government.

Chiquita eventually found itself the target of an investigation by the U.S. Justice Department, and in 2007 it pleaded guilty to criminal charges and paid a penalty of $25 million.

But that was not the end of the matter. Families of farmers and other civilians slaughtered by the AUC brought suit against the company in the U.S. with the help of EarthRights International. They argued that Chiquita improperly benefitted from the group’s reign of terror, including the purchase of land at depressed prices that had been owned by murdered farmers. It took 17 years of litigation, but the jury in the first of a series of trials just awarded the plaintiffs $38.3 million in damages.

Chiquita plans to appeal, but the verdict was a major accomplishment in the effort to hold large corporations responsible for abuses in connection with their foreign operations. In its statement hailing the verdict, EarthRights International said: “This historic ruling marks the first time that an American jury has held a major U.S. corporation liable for complicity in serious human rights abuses in another country, a milestone for justice.”

While it is true that Chiquita has major offices in Florida, the company has its international headquarters in Switzerland. Chiquita is owned by two Brazilian firms: Cutrale and the Safra Group. Fortunately, these complications did not prevent the jury from finding the company culpable under U.S. law.

Chiquita is not the only large company to have gotten into legal jeopardy for bankrolling an entity designated as a terrorist group. In 2022 Lafarge S.A., part of the Swiss building materials group Holcim, and its Syrian subsidiary pleaded guilty to a criminal charge brought by the U.S. Justice Department, accusing them of conspiring to provide material support and resources to the Islamic State of Iraq and al-Sham (ISIS) and the al-Nusrah Front, both U.S.-designated foreign terrorist organizations. Lafarge was sentenced to probation and ordered to pay $777 million in penalties.

Naming the Offenders

Regulatory agencies and prosecutors seek to punish misbehaving corporations in the hope they will change their practices and obey the rules. That happens occasionally, but all too often corporate offenders go on to break the law again, sometimes repeatedly.

The prevalence of such recidivism is one of the main conclusions that arises from the data on enforcement actions—numbering more than 600,000—my colleagues and I have collected in Violation Tracker.

Now one of the more aggressive federal regulators is planning to assemble an official resource on rogue corporations. The Consumer Financial Protection Bureau just announced it will create a registry of companies that have broken consumer protection laws and that are subject to court orders regarding their ongoing behavior.

“Too often, financial firms treat penalties for illegal activity as the cost of doing business,” said CFPB Director Rohit Chopra. “The CFPB’s new rule will help law enforcement across the country detect and stop repeat offenders.”

I am happy to report that Violation Tracker played a role in the agency’s development of the registry. As noted on page 405 of the lengthy description of the plan, CFPB made use of data from Violation Tracker to estimate how many companies might be affected.

Given that CFPB’s registry will cover only nonbank consumer finance companies, its scope will be much narrower than that of Violation Tracker, which covers all kinds of corporations, large and small. Yet it is important for there to be official compilations, since they will hopefully provide more pressure on bad actors.

It would be good if the CFPB’s move inspires the Justice Department to do more to respond to calls from members of Congress and corporate accountability advocates to create a comprehensive database on corporate crime.

Last year, DOJ created a page of its website called Corporate Crime Case Database, which initially contained only about a dozen items but was described as being “still in the process of being populated.” It’s now been about 12 months since the site went up, but that process is proceeding at a glacial pace. The page currently contains all of 85 case summaries, making it far from a comprehensive database.

It is no surprise that DOJ seems reluctant to do more to highlight its criminal enforcement, given that the department has been emphasizing leniency rather than aggressive prosecution of corporate miscreants. DOJ continues to allow large corporations to escape from criminal investigations with a deferred or non-prosecution agreement under which the company pays a penalty but does not need to plead guilty.

In theory, companies which fail to change their behavior would be subject to a real prosecution in the future, but there are many cases in which one leniency agreement is followed by nothing more than another leniency agreement.

Sometimes DOJ employs another device known as a declination in which the possibility of a prosecution is completely taken off the table. This deal was recently offered to a company called Proterial (formerly known as Hitachi Cable), which misrepresented to customers that the motorcycle brake hose assemblies it sold met federal safety performance standards. The problem was not that the company failed to test the assemblies. It did the tests but lied to customers about the results, claiming that the assemblies had passed when in fact they had failed. A page on the DOJ website lists 20 declinations, but there may be more that are not disclosed.

When it comes to corporate crime, DOJ needs to engage in more aggressive prosecutions and make sure the public knows about them.