Zero tolerance for corporate crime

Slapping Corporate Wrists a Little Harder

By Phil Mattera, Dirt Diggers Digest

Governments will go to ridiculous lengths to punish criminals. States that cling to the death penalty now resort to back-alley methods for obtaining the drugs used in lethal injections, leading to grotesque results such as the recent botched execution of Clayton Lockett in Oklahoma.

When it comes to corporate crime, a very different standard is applied. Prosecutors go out of their way to soften the impact on offenders. Criminal charges are often not filed, and when they are companies are offered deferred prosecution agreements that allow them to pay fines and make promises not to sin again.

Federal prosecutors are now feeling pressure to take a harder line, especially with global banks that may have flouted U.S. laws relating to tax evasion and international sanctions. The New York Times reports that the Justice Department is pushing to get guilty pleas from Credit Suisse, which has faced charges of helping wealthy Americans dodge taxes through secret bank accounts, and BNP Paribas, which is being investigated for violating U.S. economic sanctions against countries such as Sudan and Iran.

Getting a guilty plea from a major bank (rather than from one of its obscure subsidiaries, as happened in the LIBOR-manipulation case involving UBS) would be an important step in affirming that these institutions are not above the law. The problem is that the Justice Department does not seem to want to impose the kind of penalties that normally go along with a criminal conviction.

According to the Times, prosecutors are meeting with banking regulators “about how to criminally punish banks without putting them out of business and damaging the economy.”

We would never hear such a statement made about, say, an illegal gambling ring. There is no concern that going after such an operation would eliminate jobs and harm the economy.

As for banks, even when they are found to have engaged in egregious behavior, they are treated as legitimate institutions that must be preserved. It is true that not every employee may have been involved in criminal misconduct, but that is no reason why the continued survival of the bank in its existing form has to be regarded as an essential component of any resolution of criminal charges.

Corporate crime will not disappear until prosecutors are willing to consider truly punitive penalties for companies that engage in serious misbehavior. By this I mean consequences that go well beyond fines that a company can easily afford (and can often deduct from its taxes).

It’s often said that bringing criminal charges against corporations is pointless, since a company cannot be put in prison. Leaving aside the question of the feasibility of putting corporate executives behind bars, this view fails to acknowledge the other ways in which a firm’s liberty can be restricted.

We see such an example in the current scandal involving Los Angeles Clippers owner Donald Sterling, who is being fined $2.5 million and banned for life by the National Basketball Association for making racist statements but who also may be forced to sell the team. 

Why is the Justice Department not talking about forcing banks such as Credit Suisse and BNP Paribas to divest themselves of the operations in which the prohibited practices took place? I would prefer to see such criminal enterprises confiscated outright, but that may be too much to hope for.

Prosecutors have to weigh the economic impact of cases that might, for instance, lead to the revocation of a bank’s license to operate, which is considered the corporate equivalent of the death penalty. This is apparently behind the caution being exhibited in the Credit Suisse and BNP Paribas negotiations.

The lesson that prosecutors seem to have taken from the 2002 conviction of Arthur Andersen, the accounting firm that abetted Enron’s frauds, is that putting a company out of business is a big mistake. I don’t understand why.

The demise of Andersen and Enron and Drexel Lambert did not bring about economic calamity. In fact, the economy was probably better off without these corrupt institutions. We might also be better off if today’s miscreants met a similar fate, or at least had to undergo radical restructuring. And that would send a clear message to other corporations that they have to clean up their act.

Note: For an analysis of an industry that has a lot to clean up, including widespread wage theft, see the report just issued by the Restaurant Opportunities Center United and other groups on the National Restaurant Association and its members. I contributed the Rogues Gallery section.