Ending
the Corporate Crime Wave
By
Phil Mattera, Dirt-diggers’ Digest
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.
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.