Posted by Pratap Chatterjee on April 19th, 2012 CorpWatch Blog
EFSA Cartoon. Source: Corporate Europe Observatory
Should lobbyists for biotech and food companies be allowed to make the rules on scientifically questionable products sold in the supermarket and - by default - your kitchen? The companies like the idea because they stand to make a huge profit. Yet the European Food Safety Agency (EFSA) appears to have failed to properly regulate such conflicts
EFSA, based in Parma, Italy, investigates food and feed safety, nutrition, animal welfare, plant protection and health. The agency’s assessments – which are conducted by expert panels - are used by the European Commission in Brussels to decide whether to authorize products on the European market.
Meet Mella Frewen, our exhibit #1. She was a food lobbyist for Monsanto, the U.S. biotechnology giant and Cerestar, then Europe’s biggest starch producer. Then she moved to become director general of the Confederation of the Food and Drink Industries of the EU and now EFSA wants to appoint her to their management board.
Would that be a conflict of interest? Nina Holland from the Corporate Europe Observatory (CEO) thinks so. “The EU Commission is not doing ESFA any favours by nominating a food lobbyist as candidate for the agency’s management board. If EFSA is to regain its independence in the future, people with ties to industry should be excluded from the (expert) panels as well as from the management board,” she says.
This revolving door works both ways. The men and woman at EFSA know that they can get good jobs in industry if they quit, to help lobby their former colleagues to weaken regulations.
Catherine Geslain-Lanéelle, the executive director of EFSA, recently admitted to European Union Ombudsman in Strasbourg that the agency had “regrettably” made a mistake by not properly examining the potential conflicst of interest. “Before leaving EFSA, Ms Renckens did not provide substantial details about her new employment. EFSA was still unfamiliar with this kind of occurrences and no specific processes were in place at the time,” wrote Geslain-Lanéelle in a letter that was released to the public yesterday.
Now for exhibit #3: Harry Kuiper was the chair of the so-called GMO panel at EFSA for nearly ten years. In that time, EFSA moved from a ban on genetically modified organisms, to approving two and eventually 38. Throughout that period, Kuiper had strong ties with the International Life Sciences Institute (ILSI), which is funded by agrochemical companies and the food industry.
“We urgently need more clarity. Harry Kuiper has been involved in each and every case of risk assessment of genetically engineered plants since the start of EFSA,” says Christoph Then of Testbiotech in Munich, Germany, who brought a complaint against Kuiper to the EU Ombudsman in March. “The public has a right to know if consumers and the environment were really protected in the best possible way.”
Testbiotech and CEO says the Renckens case also want further action by EFSA to show that they are serious about banning conflicts of interests. “EFSA should have admitted its problems much earlier. (I)t is still not clear if EFSA will stop such a move to industry in the future,” says Then. (Full disclosure: This writer serves on the advisory board of the Corporate Europe Observatory)
Posted by Pratap Chatterjee on April 13th, 2012 CorpWatch Blog
Vampire Squid puppet. Photo: M.V. Jantzen. Used under Creative Commons license
In U.S. sports jargon, a “huddle” is the term used to describe players gathering in a tight circle to plan game strategy. When the Securities and Exchange Commission (SEC) discovered that Goldman Sachs researchers had weekly “huddles” with investment bankers and traders to provide them with stock tips, however, they called foul.
“From 2006 to 2011, Goldman held weekly huddles sometimes attended by sales personnel in which analysts discussed their top short-term trading ideas and traders discussed their views on the markets,” said the SEC in a press release issued earlier this week. “In 2007, Goldman began a program known as the Asymmetric Service Initiative (ASI) in which analysts shared information and trading ideas from the huddles with select clients.”
Insider trading – as we have noted before – is the practice of cashing in on information that is not known to the general public. Although it is not illegal in many other countries, the U.S. takes it very seriously and will jail violators and sometimes ban them from trading. Bigger companies – like Goldman Sachs – will typically pay out large sums in order to avoid such punishment.
This is not the first time that Goldman Sachs has been accused of insider trading. In 2003, the investment bank paid out $110 million as part of a $1.4 billion settlement with the New York state attorney general Eliot Spitzer to resolve claims of conflicts of interest. Business Week magazine’s Robert Kuttner described it thus: “(R)esearch analysts" were acting as stock touts for the firms' investment banking business instead of providing objective, independent analysis to investors.”
Three years later, it appears that the company was doing much the same thing. In 2009, the Wall Street Journal uncovered evidence: Susanne Craig published an article in which she gave specific example of a Goldman analyst named Marc Irizarry who rated mutual-fund manager Janus Capital Group Inc. as a "neutral" in early April 2008. Later that month, at an internal huddle, Irizarry said that he expected Janus to climb. The following day Goldman staff called some 50 preferred clients like Citadel Investment Group and SAC Capital Advisors, both hedge fund groups, to give them the tip. Less powerful clients had to wait six days for Irizarry’s bullish report, by which time the stock had already gained 5.8 percent.
In June 2011, Goldman Sachs paid state regulators in Massachusetts a $10 million fine to resolve the allegations of huddles. “We verified that there was a preference of some customers at the expense of others,” William F. Galvin, the state’s chief financial regulator, told the New York Times.
More details followed: An internal e-mail, written in November 2008, noted that over half of 115 accounts that were contacted by Goldman Sachs staff reported an increase in revenue. “The commercial value of these calls in the form of more revenue to GS … (is) substantial,” the complaint recorded one business manager saying. “In general we have seen about a 50 percent rise in revenue.”
This week’s settlement with the SEC requires Goldman Sachs to pay a fine of $22 million. “Despite being on notice from the SEC about the importance of (higher-order) controls, Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients,” said Robert S. Khuzami, the SEC’s enforcement director in a press release.
Goldman issued a statement saying that it “neither admitted or denied the charges.”
Given this history, it is hardly a surprise that Goldman Sach’s business model was recently caricatured by Matt Taibbi in Rolling Stone thus: “The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
Posted by Pratap Chatterjee on April 5th, 2012 CorpWatch Blog
Ian Hannam, a senior JP Morgan banker and ex-soldier, who helped finance a number of flamboyant and controversial mineral extraction projects over the last couple of decades, has resigned, after being fined $720,000 for insider trading by the UK Financial Services Authority (FSA).
Among the projects Hannam helped bankroll were multinational comglomerates digging for gold in Afghanistan and Tanzania, drilling for oil in Kurdistan, digging for bauxite in India, copper in Kazakhstan, gold and silver in Mexico and iron in the Ukraine.
Hannam raised tens of millions for each of these operations as JPMorgan’s global chairman of equity capital markets, attracting fawning attention from the world’s business elites. “In his wake, mountains are razed, villages electrified, schools built, and fortunes made,” wrote Fortune magazine last May in a glowing tribute to his plans to dig for gold in northern Baghlan province, Afghanistan. “If anyone can wrest a fortune from Afghanistan's rubble, it is this man, Ian Hannam.” Others were a little more critical. “There are those who feel he’s an unguided missile,” a South African banker told the Financial Times last September. “But the thing about missiles is they can be very effective.”
Hannam came unstuck when he fired off two emails to a business associate in Kurdistan in September 2008. The first suggest that Heritage Oil shares would soon be worth as much as £4 ($6.40) almost twice as much as the price at the time. The second email read: “PS - Tony has just found oil and it is looking good.” (Hamman was referring to a Heritage project in Uganda which later proved to be correct)
This is classic insider trading, giving out information that is not known to the general public, which allows the recipient to cash in quickly. Although it is not illegal in many countries, the U.S. frowns heavily on this and the U.K is starting to crack down on such violations.
The person Hamman emailed did not cash in on Heritage but was sufficiently impressed to hire the JP Morgan banker to set up a Kurdish investment fund.
Hannam told the FSA that the emails were an "honest error or errors of judgment” that he made "at a time of extreme turbulence in the financial markets, when he was under extreme pressure at work.”
The Financial Times has both praised and lamented the fines on Hamman. “City is right to crack whip on market abuse,” writes John Gapper. “The curse of the rainmaker strikes. Ian Hannam is the investment banker who helped turn London into the go-to financial centre for mining companies,” writes the Lex column. “(F)inancial centres such as London need to make sure that relationship banking continues to find a home.”
We agree with Gapper. But we are not so sure that the Lex column’s suggestion that “relationship banking” (read borderline insider trading) is such a good thing, especially when its purpose is to enrich a few at the expense of many, such as farmers and scavengers in Tanzania, as well as that of the sacred lands and environment of indigenous communities like the Dongria Kondh.
Posted by Pratap Chatterjee on March 8th, 2012 CorpWatch Blog
Poker Winnings. Photo: dcJohn. Used under Creative Commons license
Sherkhan Farnood, the founder of Kabul Bank in Afghanistan, is the focus of a front page New York Times article today. The 51 year old international poker player is held up as a symbol of the “pervasive graft (that) has badly undercut the American war strategy” noting that he owes the bank $467 million. But in reality, the powerful men behind the bank - Mahmoud Karzai, brother to the Afghan president, Hamid Karzai, and Abdul Hasin Fahim, brother to the vice-president, General Qasim Fahim – are the real symbols of corruption in the country.
Zahid Walid was started by Hasin Fahim with the help of his warlord brother who had been a key ally of the U.S. during the 2001 invasion. The company won a series of lucrative contracts to pour concrete for a NATO base, as well as portions of the U.S. embassy being rebuilt in Kabul and the city's airport, which was in a state of disrepair.
Next the company started importing Russian gas, and not long after that, Abdul Hasin set up the Gas Group, which markets bottled gas to households and small businesses. More lucrative deals followed - beginning in the winter of 2006, Zahid Walid won over $90 million in contracts from the Afghan ministry of energy and water to supply fuel to the diesel power plants in Kabul.
In 2007, Fahim and his fellow shareholders at Kabul Bank, approached Mahmoud Karzai with an offer – they would lend him $5 million to take an ownership stake in the bank. “The only way to get contracts and protection is to have support in the political system … That was political survivalism. They knew they needed a Karzai,” an Afghan political leader told the New York Times.
In early 2009, Hasin Fahim and Mahmoud Karzai approached the president with a suggestion – why not take on General Fahim as vice-president? After Hamid Karzai agreed, Kabul Bank, together with another politically connected bank, Ghazanfar, donated millions to his re-election campaign.
But it isn’t the only time that the U.S. government and its political allies have entrusted large sums of money to neophytes willing to do their bidding in the War on Terror. In Iraq, the U.S. hired Ziad Cattan, a Polish Iraqi used-car dealer, to work at the Ministry of Defense where he spent $1.3 billion on military equipment that was “shoddy, overpriced or never delivered” such as aging Russian helicopters and underpowered Polish transport vehicles. "Before, I sold water, flowers, shoes, cars — but not weapons," Cattan told the Los Angeles Times. "We didn't know anything about weapons."
"He was somebody we recruited, and we were taking a chance on him just like on everybody else," said Frederick Smith, a former Defense Department official told the newspaper. "Ziad is not a choirboy. But he was willing to serve."
The same goes for 21 year old Efraim Diveroli, who was awarded a $300 million contract in 2007 to supply weapons to the Afghan security forces. Diveroli and his partner David Packouz sent decades-old Kalashnikov ammunition in corroded packaging to the war, and repackaging and obscuring the origins of Chinese cartridges procured from Albania. "I didn't know anything about the situation in that part of the world. But I was a central player in the Afghan war — and if our delivery didn't make it to Kabul, the entire strategy of building up the Afghanistan army was going to fail,” Packouz later told Rolling Stone. “Here I was dealing with matters of international security, and I was half-baked (high on marijuana). It was totally killing my buzz.”
Handing over millions to flower sellers, stoners, poker players – who gamble the money away - is it that surprising that the money for the War on Terror isn’t going very well
“In the movie ‘Wall Street’ I played Gordon Gekko, who cheated to profit while innocent investors lost their savings. The movie was fiction but the problem is real,” says Douglas in the ad. “Our economy is increasingly dependent on the success and integrity of the financial markets. If a deal looks too good to be true, it probably is.”
Increasingly, however, it seems that the UK needs a similar campaign for the City of London, which has become the center for the mantra “Greed is Good.”
Why is London so attractive to wealthy traders? One of the reasons is the relative lack of enforcement against criminal activity. New York authorities have prosecuted 66 people for insider trading, with 57 convictions or guilty pleas since 2009.
The UK has relied on fines to push the envelope a little against financial services abuse. Philippe Jabre, a former managing director of hedge fund manager GLG Partners, was told to pay £750,000 in August 2006 for illegally dealing in securities of Sumitomo Mitsui Financial Group. JP Morgan was fined £33.3million in June 2010 by the FSA for failing to segregate client money in overnight accounts. Last month, David Einhorn and his fund Greenlight Capital, were fined £7.2m for insider trading about a planned 2009 equity fundraising by Punch Taverns.
“It has been far slower going in London, where many hedge funds operate, let alone in Geneva,” writes John Gapper of the Financial Times. “The small minority that breaks the rules has a much lower chance of either being caught or, when caught, jailed.”
One of the reasons is that the FBI has been more effective is its ability to monitor mobile phone calls and conference calls. The UK, however, does not allow phone-tapping to convict traders.
Wheatley comes to the job from Hong Kong where he secured 171 convictions in the past three years as head of the Hong Kong Securities and Futures Commission (SFC), representing over two thirds of the cases in the last 23 years. Will he finally be able to crack down on the Gordon Geckos in the City of London?
The bracing reality that America has two sets of rules -- one for the
corporate class and another for the middle class -- has never been more
The middle class, by and large, plays by the rules, then watches as
its jobs disappear -- and the Senate takes a break instead of extending
unemployment benefits. The corporate class games the system -- making
sure its license to break the rules is built into the rules themselves.
One of the most glaring examples of this continues to be the ability
of corporations to cheat the public out of tens of billions of dollars a
year by using offshore tax havens. Indeed, it's estimated that
companies and wealthy individuals funneling money through offshore tax
havens are evading around $100 billion a year in taxes -- leaving the rest of
us to pick up the tab. And with cash-strapped states all across the
country cutting vital services to the bone, it's not like we don't need
You want Exhibit A of two sets of rules? According to the White
House, in 2004, the last year data on this was compiled, U.S.
multinational corporations paid roughly $16 billion in taxes on $700 billion
in foreign active earnings -- putting their tax rate at around 2.3
percent. Know many middle class Americans getting off that easy at tax
In December 2008, the Government Accounting Office reported
that 83 of the 100 largest publicly-traded companies in the country --
including AT&T, Chevron, IBM, American Express, GE, Boeing, Dow, and
AIG -- had subsidiaries in tax havens -- or, as the corporate class
comically calls them, "financial privacy jurisdictions."
Even more egregiously, of those 83 companies, 74 received government
contracts in 2007. GM, for instance, got more than $517 million from the
government -- i.e. the taxpayers -- that year, while shielding profits
in tax-friendly places like Bermuda and the Cayman Islands. And Boeing,
which received over $23 billion in federal contracts that year, had 38
subsidiaries in tax havens, including six in Bermuda.
And while it's as easy as opening up an island P.O. Box, not every
big company uses the dodge. For instance, Boeing's competitor Lockheed
Martin had no offshore subsidiaries. But far too many do -- another GAO
that over 18,000 companies are registered at a single address in the
Cayman Islands, a country with no corporate or capital gains taxes.
America's big banks -- including those that pocketed billions from
the taxpayers in bailout dollars -- seem particularly fond of the Cayman
Islands. At the time of the GAO report,
Morgan Stanley had 273 subsidiaries in tax havens, 158 of them in the
Cayman Islands. Citigroup had 427, with 90 in the Caymans. Bank of
America had 115, with 59 in the Caymans. Goldman Sachs had 29 offshore
havens, including 15 in the Caymans. JPMorgan had 50, with seven in the
Caymans. And Wells Fargo had 18, with nine in the Caymans.
Perhaps no company exemplifies the corporate class/middle class
double standard more than KBR/Halliburton. The company got billions from
U.S. taxpayers, then turned around and used a Cayman Island tax dodge
to pump up its bottom line. As the Boston Globe's Farah
Stockman reported, KBR, until 2007 a unit of Halliburton,
"has avoided paying hundreds of millions of dollars in federal Medicare
and Social Security taxes by hiring workers through shell companies
based in this tropical tax haven."
In 2008, the company listed 10,500 Americans as being officially
employed by two companies that, as Stockman wrote, "exist in a computer
file on the fourth floor of a building on a palm-studded boulevard here
in the Caribbean." Aside from the tax advantages, Stockman points out
another benefit of this dodge: Americans who officially work for a
company whose headquarters is a computer file in the Caymans are not
eligible for unemployment insurance or other benefits when they get laid
off -- something many of them found out the hard way.
This kind of sun-kissed thievery is nothing new. Indeed, back in
2002, to call attention to the outrage of the sleazy accounting trick, I
wrote a column announcing I was thinking of moving my
syndicated newspaper column to Bermuda:
I'll still live in America, earn my living here, and enjoy
the protection, technology, infrastructure, and all the other myriad
benefits of the land of the free and the home of the brave. I'm just
changing my business address. Because if I do that, I won't have to pay
for those benefits -- I'll get them for free!
Washington has been trying to address the issue for close to 50 years
-- JFK gave it a go in 1961. But time and again Corporate
America's game fixers -- aka lobbyists -- and water carriers in
Congress have managed to keep the loopholes open.
The battle is once again afoot. On Friday, the House passed the American
Jobs and Closing Tax Loopholes Act. The bill, in addition to
extending unemployment benefits, clamps down on some of they ways
corporations hide their income offshore to avoid paying U.S. taxes. Even
though practically every House Republican voted against it, the bill passed 215 to 204.
The bill's passage in the Senate, however, remains in doubt, with
lobbyists gearing up for a furious fight to make sure America's
corporate class can continue to profitably enjoy the largess of
government services and contracts without the responsibility of paying
its fair share.
The bill is far from perfect -- it leaves open a number of loopholes
and would only recoup a very small fraction of the $100 billion
corporations and wealthy individuals are siphoning off from the U.S.
Treasury. And it wouldn't ban companies using offshore tax havens from
receiving government contracts, which is stunning given the hard times
we are in and the populist groundswell at the way average Americans are
getting the short end of the stick.
But the bill would end one of the more egregious examples of the
double standard between the corporate class and the middle class,
finally forcing hedge fund managers to pay taxes at the same rate as
everybody else. As the law stands now, their income is considered
"carried interest," and is accordingly taxed at the capital gains rate
of 15 percent.
The issue was famously brought up in 2007 by Warren Buffett when he noted that his receptionist paid 30 percent of her
income in taxes, while he paid only 17.7 percent on his taxable income
of $46 million dollars.
As Robert Reich points out, the 25 most successful hedge fund
managers earned $1 billion each. The top earner clocked in at $4
billion. And all of them paid taxes at about half the rate of Buffett's
Closing this outrageous loophole would bring in close to $20 billion
dollars in revenue -- money desperately needed at a time when teachers
and nurses and firemen are being laid off all around the country.
Hedge fund lobbyists are currently hacking away at the Senate's
resolve with, not surprisingly, some success. And it's not just
Republicans who are willing to do their bidding, but a number of
Democrats as well. Indeed, it was a Democrat -- Chuck Schumer -- who led the fight against closing the loophole in
"I don't know how members of Congress can return home and look an
office manager, a nurse, a court clerk in the eye and say 'I chose hedge
fund managers instead of you and your family'," said Lori Lodes of the SEIU.
Nicole Tichon, of the U.S. Public Interest Research Group, framed the debate in similar terms:
It's hard to imagine anyone campaigning on protecting hedge
fund managers, Wall Street banks and companies that ship jobs and
profits overseas. It's hard to imagine telling constituents that somehow
they should continue to subsidize these industries. We're anxious to
see whose side the Senate is on and what story they want to tell the
Up until now, the story has been a familiar narrative of Two
Americas, with one set of rules for those who can afford to hire a fleet
of K Street lobbyists and a different set for everybody else. It's time
to give this infuriating tale a different -- and far more just and
satisfying -- ending.
The RDM case may become the first test for the Netherlands’ new anti-corruption legislation and for its will and ability to prosecute corporations for making foreign bribes.
The RDM bribery scandal dates back to 1998 when the company sold 202 Leopard tanks to the Chilean army. The Rotterdam-based company had purchased the tanks as scrap metal from the Dutch Department of Defense and rebuilt them. It then paid bribes to Chilean army officials facilitating the sale.
Joep van den Nieuwenhuyzen, the Dutch businessman, and officials of his company—who offered and facilitated the bribes—have never been prosecuted in relation to this case. The Dutch Public Prosecutor’s Office told CorpWatch that at the time of RDM’s bribes, the Netherlands had no laws against offering bribes to officials overseas. Legislation to make these practices illegal was introduced in 2001. Further muddying the waters, RDM went bankrupt in 2006, and Joep van den Nieuwenhuyzen, its owner, was jailed for fraud. He was released two years ago.
The current Dutch government investigation will delve further into the extent and mechanics of the bribery scheme, and interview key politicians active at the time. A Dutch parliamentary team is following up on the case in the Netherlands and in Chile. Key targets of the investigation include Edmundo Perez Yoma, Chile’s former minister of defense and currently its interior minister, along with his then deputy Mario Fernandez, now member of the Constitutional Court. Both are suspected of facilitating the bribery. Chile has announced similar investigations.
One Dutch official at the time of the tank sales, then Minister of Defense Joris Voorhoeve, joined the call for parliament to undertake a broad investigation into RDM’s bribes. He defended his own role. While Voorhoeve acknowledges that he issued an export license for the 202 Dutch Leopard tanks, he maintains he is appalled and shocked by the allegations of bribery. “The Netherlands government would never agree to pay bribes to get a deal closed,” he said, “nor participate in any other form of corruption.” The sales were justified, he said, because when they took place in 1998, Chile had become a democracy and General Augusto Pinochet, who had ruled from 1973 to 1990, was no longer president. But in fact, the former dictator still wielded considerable influence as senator for life and commander-in-chief of the armed forces, positions he retained until his death in 2006.
The parliamentary investigation, while welcomed by many, is late in coming. For years politicians ignored requests by the Netherlands Socialist Party for a formal investigation—again, sparked in part by CorpWatch’s reporting on the money RDM paid to the former dictator and his entourage.
According to a Swiss newspaper, van den Nieuwenhuyzen, currently a Swiss resident, said that he was not aware that the company he once owned was under investigation for payments to Chilean army officials.
But former RDM workers and associates charged that the company paid millions to Chilean colonels and brigadier generals through a third party, with $1.6 million going to a private consultant to the late general Pinochet. RDM said the $1.6 million was a donation to the Pinochet Foundation, a Santiago-based organization that promotes the general’s legacy.
Chilean and cooperating Dutch private investigators that examined the Pinochet’s overseas bank accounts have found that the dictator had stashed almost $28 million overseas, mainly in European bank accounts. Dutch investigators will look for links between that money, the two recently jailed Chilean army officers, and Pinochet.
The spokesperson of the Dutch Socialist Party in Rotterdam told CorpWatch that there have been no successful prosecutions of corporations in the Netherlands for foreign bribes, because it is extremely difficult to secure evidence in foreign countries. Of the scores of cases under consideration, none have yet reached the courts. If RDM is charged, it will be the first time Dutch officials or businesspeople are prosecuted under the new regulations.
Before his execution, Socrates was visited in prison by his friend
Crito, who told him the bribes for the guards were ready and Socrates
could escape whenever he wished. Socrates refused to go.
Crito, angered, argued Socrates would a) leave his children orphans
and b) bring shame on his friends, because people would assume they
were too cheap to finance his escape. (Apparently, this sort of thing
was common in Athens in those days.)
Socrates replied that in his imagination, he hears the Laws of
Athens saying, “What do you mean by trying to escape but to destroy us,
the Laws, and the whole city so far as in you lies? Do you think a
state can exist and not be overthrown in which the decisions of law are
of no force and are disregarded and set at naught by private
In short, either Socrates or the rule of law had to die. Socrates
chose to die rather than diminish his city. Now, as then, he’d be a
lonely guy. His notion that the city lay within him – that he was the city of Athens – is striking.
All failure to enforce law – or to work
around it – is bad. This applies equally to speed limits, armed robbery
and banking regulations. Failure to enforce our agreed-upon standards
weakens our social bonds and undermines faith in both our justice
system and our government. If the police will not apprehend or the
courts will not prosecute or the legislatures draw protective circles
around certain elements in society, then society as a whole suffers.
There is within all of us an affinity for justice. The majority of
citizens have no training in law or political science, but we possess
intuitive notions of right and wrong. We’re willing to tolerate some
discrepancy on either margin of the page, but when things are pushed
too far out of balance on either side, then the door to vigilantism,
riot and revolution is opened.
This great imbalance – and we’re getting strong whiffs of it now –
is a failure by our institutions to enforce the terms of the American
“America is a classless society.” “All citizens stand equal before
the law.” Blah, blah, blah. It’s illegal to rob a convenience store.
It’s illegal to defraud investors. The accused robber, who flashed a
knife and made off with eighty or a hundred bucks, sits behind steel
bars and waits for his overburdened public defender to get around to
speaking with him.
The accused fraudulent investment fund manager, who flashed a phony
set of books and made off with eight or fifty billion dollars, sits in
his cosmopolitan penthouse and consults a million-dollar legal team,
which he pays with ill-gotten dosh.
If we vigorously enforce laws on the working class and make only
half-hearted attempts to do so with the managing class, then the class
warfare Republican politician are always whining about comes closer to
Worse, by allowing Ken Lays, Bernie Madoffs and Allen Stanfords to
get off easy, it destroys real opportunity for people in the working
classes to realize the American dream for themselves and their
children. The crimes of the managing class – unlike the convenience
store robber – have the real effect of depriving millions – both here
and abroad - of their livelihoods and homes when the financial system
In the news and before Congressional committee, we hear that
regulators were specifically warned for years that Bernie Madoff and
Allen Stanford were violating regulations.
While the beltway talkers argue over whether Wall Street bankers
should be allowed to keep their bonuses and exorbitant salaries, the
discussion that had yet to start is: why were these highly leveraged
instruments and securitized debt transactions legal in the first place?
We’re told incessantly that the Wall Street banking transactions were
so complicated that “no one really understands them.” There is,
however, the easily understood principle that one’s debts should be
balanced by one’s assets. Or one’s at least one’s assets should be
within shouting distance of one’s debts.
We have speed limits not because driving 110 is inherently evil, but
because it is unsafe and anyone who does shows reckless disregard for
themselves and others. And yet, a legion of reckless drivers loosed on
the interstate for a decade could not have wrought as much misery as
this handful of bankers, brokers and hedge fund managers.
We will now suffer for years. These will be hard times, but within
this hardship will be opportunities to rediscover the extent to which
our society lives within in us, as Socrates would have said.
For the past eight years, the oil giant formerly known as British
Petroleum has tried to convince the world that its initials stand for
“Beyond Petroleum.” An announcement just issued by the U.S.
Environmental Protection Agency may suggest that the real meaning of BP
is Brazen Polluter.
The EPA revealed
that BP Products North America will pay nearly $180 million to settle
charges that it has failed to comply with a 2001 consent decree under
which it was supposed to implement strict controls on benzene and
benzene-tainted waste generated by the company’s vast oil refining
complex in Texas City, Texas, located south of Houston. Since the
1920s, benzene has been known to cause cancer.
Among BP’s self-proclaimed corporate values
is to be “environmentally responsible with the aspiration of ‘no damage
to the environment’” and to ensure that “no one is subject to
unnecessary risk while working for the group.” Somehow, that message
did not seem to make its way to BP’s operation in Texas City, which has
a dismal performance record.
The benzene problem in Texas City was supposed to be addressed as part of the $650 million agreement
BP reached in January 2001 with the EPA and the Justice Department
covering eight refineries around the country. Yet environmental
officials in Texas later found that benzene emissions at the plant
remained high. BP refused to accept that finding and tried to stonewall
the state, which later imposed a fine of $225,000.
In March 2005 a huge explosion (photo) at the refinery killed 15
workers and injured more than 170. The blast blew a hole in a benzene
storage tank, contaminating the air so seriously that safety
investigators could not enter the site for a week after the incident.
BP was later cited for egregious safety violations and paid a record fine of $21.4 million. Subsequently, a blue-ribbon panel chaired by former secretary of state James Baker III found
that BP had failed to spend enough money on safety and failed to take
other steps that could have prevented the disaster in Texas City. Still
later, the company paid a $50 million fine as part of a plea agreement on related criminal charges.
In an apparent effort to repair its image, BP has tried to associate
itself with positive environmental initiatives. The company was, for
instance, one of the primary sponsors
of the big Good Jobs/Green Jobs conference held in Washington earlier
this month. Yet as long as BP operates dirty facilities such as the
Texas City refinery, the company’s sunburst logo, its purported
earth-friendly values and its claim of going beyond petroleum will be
nothing more than blatant greenwashing.
It was only a few years ago that a group of offshore outsourcing
companies based in India seemed poised to take over a large portion of
the U.S. economy. Business propagandists insisted that work ranging
from low-level data input to skilled professional work such as
financial analysis could be done faster and much cheaper by workers
hunched over computer terminals in cities such as Bangalore. The New York Times once described one of these offshoring companies as “a maquiladora of the mind.”
Among the most aggressive of the Indian firms was Satyam Computer
Services Ltd., which signed up blue-chip clients such as Ford Motor,
Merrill Lynch, Texas Instruments and Yahoo. In a 2004 report
I wrote for the U.S. high-tech workers organization WashTech, I found
that Satyam was also among the offshoring companies that were doing
work for state government agencies. It was hired, for example, as a
subcontractor by the U.S. company Healthaxis to develop a system for
handling applications for medical insurance services provided by the
Washington State Health Care Authority. As it turned out, Healthaxis’s
contract was terminated, allegedly because of late delivery and poor
quality in the work done by Satyam.
The Washington State fiasco may have been an early omen of things to come. Satyam has just admitted that for years it cooked its books and engaged in widespread financial wrongdoing. The revelation came in a letter
sent to the company’s board of directors by Satyam founder and chairman
B. Ramalinga Raju (photo), who simultaneously tendered his resignation.
Raju wrote that what started as “a marginal gap between actual
operating profit and the one reflected in the books” eventually
“attained unmanageable proportions” as the company grew. The fictitious
cash balance grew to more than US$1 billion. “It was like riding a
tiger,” Raju colorfully wrote, “not knowing how to get off without
While admitting that he engaged in very creative accounting, Raju
insisted he did not personally benefit from the fraud, denying for
instance that he had sold any of his shares in the company. I guess it
is meant to be some consolation that among his sins Raju is not guilty
of insider trading.
Apart from Raju, the party most on the hot seat is the company’s
auditor, PriceWaterhouseCoopers, whose Indian unit gave Satyam’s
financial reports a clean bill of health.
The Satyam scandal is being called India’s Enron. It should probably
also be called India’s Arthur Andersen as this seems to be another case
in which an auditor was either oblivious to widespread accounting
misconduct by one of its clients or complicit in it.
Some soul-searching is probably also in order for the many large
U.S. corporations that have not hesitated to take jobs away from
American workers and ship the work off to Indian companies such as
Satyam. The revelation that much of the work has been going to a
crooked company is all the more galling.
Why would "criminals" set fire to millions worth in mine equipment?
How was it that these "intruders" had an estimated 3,000 - 4,000 people backing them up?
In what appears to be a spontaneous civilian movement against Barrick Gold, the world's largest gold miner, thousands of people invaded Barrick`s
North Mara Gold Mine this week in Tarime District and destroyed equipment worth
$15 million. Locals say that the uprising was sparked by the killing of a local, identified as Mang'weina Mwita Mang'weina. According to a Barrick Public Relations officer (as reported by the Tanzanian Guardian newspaper), "the intruders stoned the security personnel relentlessly until they
overpowered them. The guards abandoned their posts and retreated to
Barrick implies that "high levels of crime" are the cause of this
recent outbreak, recent reports suggest a different picture.
Allan Cedillo Lissner, a photojournalist who recently documented mine life near the North Mara mine, explains:
Ongoing conflict between the mine
and local communities has created a climate of fear for those who live
nearby. Since the mine opened in 2002, the Mwita family say that they
live in a state of constant anxiety because they have been repeatedly
harassed and intimidated by the mine's private security forces and by
government police. There have been several deadly confrontations in
the area and every time there are problems at the mine, the Mwita
family say their compound is the first place the police come looking.
During police operations the family scatters in fear to hide in the
bush, "like fugitives," for weeks at a time waiting for the situation
to calm down. They used to farm and raise livestock, "but now there are
no pastures because the mine has almost taken the whole land ... we
have no sources of income and we are living only through God's wishes.
... We had never experienced poverty before the mine came here." They
say they would like to be relocated, but the application process has
been complicated, and they feel the amount of compensation they have
been offered is "candy."
Evans Rubara, an investigative journalist from
Tanzania, blames this action on angry locals from the North Mara area
who are opposed to Barrick's presence there. "This comes one week after
Barrick threatened to leave the country based on claims that they
weren't making profit," comments Evans after explaining that Barrick
does not report profit to avoid taxes in the country. "This is a sign
to both the government of Tanzania and the International community
(especially Canada) that poor and marginalized people also get tired of
oppression, and that they would like Barrick to leave."
Only one week prior, Barrick's African Region Vice President, Gareth Taylor threatened
to leave Tanzania due to high operating costs, claiming that the company did not make profits there. Barrick's Toronto office
quickly denied this report, stating that "the company will work with
the government to ensure
the country's legislation remains 'competitive with other
jurisdictions so that Tanzanians can continue to benefit from
Interestingly, Taylors threat came shortly after he attended a workshop to launch the Extractive Industries Transparency Initiative (EITI) in Dar es Salaam.
One thing is clear, though; these reports of hundreds, backed by thousands, of villagers attacking mine infrastructure reflects a resentment that goes beyond mere criminal
action. And this surge in violence should be examined in the context of
the on-going exploitation and repressive environment surrounding the
As the Federal Reserve and
Treasury Department careen from one financial meltdown to another,
desperately trying to hold together the financial system -- and with
it, the U.S. and global economy -- there are few voices denying that
Wall Street has suffered from "excesses" over the past several years.
The current crisis is the culmination of a quarter century's
deregulation. Even as the Fed and Treasury scramble to contain the
damage, there must be a simultaneous effort to reconstruct a regulatory
system to prevent future disasters.
There is more urgency to such an effort than immediately apparent. If
the Fed and Treasury succeed in controlling the situation and avoiding
a collapse of the global financial system, then it is a near certainty
that Big Finance -- albeit a financial sector that will look very
different than it appeared a year ago -- will rally itself to oppose
new regulatory standards. And the longer the lag between the end (or
tailing off) of the financial crisis and the imposition of new
legislative and regulatory rules, the harder it will be to impose
meaningful rules on the financial titans.
hyper-complexity of the existing financial system makes it hard to get
a handle on how to reform the financial sector. (And, by the way,
beware of generic calls for "reform" -- for Wall Street itself taken up
this banner over the past couple years. For the financial mavens,
"reform" still means removing the few regulatory and legal requirements they currently face.)
But the complexity of the system also itself suggests the most
important reform efforts: require better disclosure about what's going
on, make it harder to engage in complicated transactions, prohibit some
financial innovations altogether, and require that financial
institutions properly fulfill their core responsibilities of providing
credit to individuals and communities.
(For more detailed discussion of these issues -- all in plain, easy-to-understand language, see these comments from Damon Silvers of the AFL-CIO, The American Prospect editor Robert Kuttner, author of the The Squandering of America and Obama's Challenge, and Richard Bookstaber, author of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation.)
Here are a dozen steps to restrain and redirect Wall Street and Big Finance:
1. Expand the scope of financial regulation. Investment banks and hedge
funds have been able to escape the minimal regulatory standards imposed
on other financial institutions. Especially with the government safety
net -- including access to Federal Reserve funds -- extended beyond the
traditional banking sector, this regulatory black hole must be
2. Impose much more robust standards for disclosure and transparency.
Hedge funds, investment banks and the off-the-books affiliates of
traditional banks have engaged in complicated and intertwined
transactions, such that no one can track who owes what, to whom.
Without this transparency, it is impossible to understand what is going
on, and where intervention is necessary before things spin out of
3. Prohibit off-the-books transactions. What's the purpose of
accounting standards, or banking controls, if you can evade them by
simply by creating off-the-books entities?
4. Impose regulatory standards to limit the use of leverage (borrowed
money) in investments. High flyers like leveraged investments because
they offer the possibility of very high returns. But they also enable
extremely risky investments -- since they can vastly exceed an
investor's actual assets -- that can threaten not just the investor
but, if replicated sufficiently, the entire financial system.
5. Prohibit entire categories of exotic new financial instruments.
So-called financial "innovation" has vastly outstripped the ability of
regulators or even market participants to track what is going on, let
alone control it. Internal company controls routinely fail to take into
account the possibility of overall system failure -- i.e., that other
firms will suffer the same worst case scenario -- and thus do not
recognize the extent of the risks inherent in new instruments.
6. Subject commodities trading to much more extensive regulation.
Commodities trading has become progressively deregulated. As
speculators have flooded into the commodities markets, the trading
markets have become increasingly divorced from the movement of actual
commodities, and from their proper role in helping farmers and other
commodities producers hedge against future price fluctuations.
7. Tax rules should be changed so as to remove the benefits to
corporate reliance on debt. "Payments on corporate debt are tax
deductible, whereas payments to equity are not," explains Damon Silvers
of the AFL-CIO. "This means that, once you take the tax effect into
account, any given company can support much more debt than it can
equity." This tax arrangement has fueled the growth of private equity
firms that rely on borrowed money to buy corporations. Many are now
8. Impose a financial transactions tax.
A small financial transactions tax would curb the turbulence in the
markets, and, generally, slow things down. It would give real-economy
businesses more space to operate without worrying about how today's
decisions will affect their stock price tomorrow, or the next hour. And
it would be a steeply progressive tax that could raise substantial sums
for useful public purposes.
9. Impose restraints on executive and top-level compensation. The top
pay for financial impresarios is more than obscene. Executive pay and
bonus schedules tied to short-term performance played an important role in driving the worst abuses on Wall Street.
10. Revive competition policy. The repeal of the Glass-Steagall Act,
separating traditional banks from investment banks, was the culmination
of a progressive deregulation of the banking sector. In the current
environment, banks are gobbling up the investment banks. But this
arrangement is paving the way for future problems. When the investment
banks return to high-risk activity at scale (and over time they will,
unless prohibited by regulators), they will directly endanger the banks
of which they are a part. Meanwhile, further financial conglomeration
worsens the "too big to fail" problem -- with the possible failure of
the largest institutions viewed as too dangerous to the financial
system to be tolerated -- that Treasury Secretary Hank Paulson cannot
now avoid despite his best efforts. In this time of crisis, it may not
be obvious how to respect and extend competition principles. But it is
a safe bet that concentration and conglomeration will pose new problems
in the future.
11. Adopt a financial consumer protection agenda that cracks down on abusive lending practices.
Macroeconomic conditions made banks interested in predatory subprime
loans, but it was regulatory failures that permitted them to occur. And
it's not just mortgage and home equity loans. Credit card and student
loan companies have engaged in very similar practices -- pushing
unsustainable debt on unreasonable terms, with crushing effect on
individuals, and ticking timebomb effects on lenders.
12. Support governmental, nonprofit, and community institutions to
provide basic financial services. The effective governmental takeover
of Fannie Mae, Freddie Mac and AIG means the U.S. government is going
to have a massive, direct stake in the global financial system for some
time to come. What needs to be emphasized as a policy measure, though,
is a back-to-basics approach. There is a role for the government in
helping families get mortgages on reasonable terms, and it should make
sure Fannie and Freddie, and other agencies, serve this function.
Government student loan services offer a much better deal than private
lender alternatives. Credit unions can deliver the basic banking
services that people need, but they need back-up institutional support
to spread and flourish.
What is needed, in short, is to reverse the financial deregulatory wave
of the last quarter century. As Big Finance mutated and escaped from
the modest public controls to which it had been subjected, it demanded
that the economy serve the financial sector. Now it's time to make sure
the equation is reversed.
The recent decision by the U.S. Supreme Court to slash the damage
award in the Exxon Valdez oil spill case and the indictment of Sen. Ted
Stevens on corruption charges are not the only controversies roiling
Alaska these days. The Last Frontier is also witnessing a dispute over
a proposal to open a giant copper and gold mine by Bristol Bay, the
headwaters of the world’s largest wild sockeye salmon fishery. Given
the popularity of salmon among the health-conscious, even non-Alaskans
may want to pay attention to the issue.
The Pebble mine project
has been developed by Vancouver-based Northern Dynasty Ltd., but the
real work would be carried out by its joint venture partner Anglo
American PLC, one of the world’s largest mining companies. Concerned
about the project and unfamiliar with Anglo American, two Alaska
organizations—the Renewable Resources Coalition
and Nunamta Aulukestai (Caretakers of the Land)—commissioned a
background report on the company, which has just been released and is
available for download on a website called Eye on Pebble Mine (or at this direct PDF link). I wrote the report as a freelance project.
Anglo American—which is best known as the company that long
dominated gold mining in apartheid South Africa as well as diamond
mining/marketing through its affiliate DeBeers—has assured Alaskans it
will take care to protect the environment and otherwise act responsibly
in the course of constructing and operating the Pebble mine. The
purpose of the report is to put that promise in the context of the
company’s track record in mining operations elsewhere in the world.
The report concludes that Alaskans have reason to be concerned about
Anglo American. Reviewing the company’s own worldwide operations and
those of its spinoff AngloGold in the sectors most relevant to the
Pebble project—gold, base metals and platinum—the report finds a
troubling series of problems in three areas: adverse environmental
impacts, allegations of human rights abuses and a high level of
workplace accidents and fatalities.
The environmental problems include numerous spills and accidental
discharges at Anglo American’s platinum operations in South Africa and
AngloGold’s mines in Ghana. Waterway degradation occurred at Anglo
American’s Lisheen lead and zinc mine in Ireland, while children living
near the company’s Black Mountain zinc/lead/copper mine in South Africa
were found to be struggling in school because of elevated levels of
lead in their blood.
The main human rights controversies have taken place in Ghana, where
subsistence farmers have been displaced by AngloGold’s operations and
have not been given new land, and in the Limpopo area of South Africa,
where villagers were similarly displaced by Anglo American’s platinum
High levels of fatalities in the mines of Anglo American and
AngloGold—more than 200 in the last five years—have become a major
scandal in South Africa, where miners staged a national strike over the
issue late last year.
Overall, the report finds that Anglo American’s claims of social
responsibility appear to be more rhetoric than reality. Salmon eaters
I was one of a group including a translator, Marwan Mawiri, who worked for
a year and ½ for Titan, now an L-3 subsidiary, in
Iraq. Marwan has witnessed first-hand numerous problems with the way
interrogation and translation contracting is being handled in Iraq – a
practice that may be putting at substantial risk the national security and
lives of the Iraqi people, of U.S. and multinational troops, officials
and contractors, and of the United States itself.
The problem is clear: inadequate and downright bad vetting and hiring practices for analysts, interrogators and linguists. Indeed, the U.S. military has recently cancelled Titan’s translation contract due to poor practices along with waste, fraud and abuse.
What is also crystal clear is that the war in Iraq can neither be won,
effectively prosecuted, nor competently withdrawn from until these
problems are solved and until proper oversight is in place.
If people hired to translate in critical battlefield and other situations
are not even fluent in at least Arabic and English; if screeners
monitoring the entry and exit of people to U.S. military bases at times
have no more qualification and training than having been a baggage
screener at a U.S. airline (see CorpWatch’s new report [note: updated December 2008] "Outsourcing Intelligence in Iraq":); if
interrogators are not qualified, experienced and trained to the highest
standards possible, how can we ensure that we avoid future travesties due
to bad intelligence? Such as the bad intelligence around the supposed
Iraqi weapons of mass destruction program (which was, of course, Bush/Cheney and neocon-driven, not L-3-driven), that got the U.S. into this war
in the first place? (And remember, even when U.S. soldiers start coming
home from Iraq, large numbers of private contractors will stay, making proper
oversight all the more crucial.)
It turned out that L-3’s management wasn’t so happy to see us, and that my co-worker, Pratap Chatterjee and I, were supposed to have received a
certain admission ticket to attend the meeting. The same went for our companions from the Iraq Campaign 2008 – a major coalition to oppose the war, which is now taking on private military contractors as part of their broader campaign on the high cost U.S. taxpayers are paying for the war in Iraq – and Foreign Policy in Focus, who were holding proxies. Funny that.
Looking out at the Statue of Liberty from the hotel lobby downstairs, where we gathered to figure out how to proceed, I pondered the damage this
war has done to the liberties of so many Iraqi people, and to so many
U.S. liberties and values that I hold dear. Like respect for human
rights, compliance with the Geneva Conventions around torture, appropriate
security that is handled with skill and integrity. I wasn’t surprised that
L-3/Titan didn’t want to hear our message; though I sincerely hope some of the shareholders, managers, directors, staff and financial analysts do
take the time to read our report and to talk to current and former contractors like Marwan. We didn’t go in malice.
We went in genuine concern over business operations that, while they may
be earning a pretty profit for large shareholders, pose a genuine
reputational risk to the company for future liability. And are causing harm on the ground, to real people. We challenge L-3 Communications
to become a truly ethical leader in business
practices, not just in products and sales. Surely the sixth-largest U.S. defense industry company (according to their website) has the intelligence to recognize bad
practices and the ability to change them for the better.
Or are we simply destined for years more, as Huffington Post blogger
Charlie Cray put it, of companies and investors milking a “Baghdad Bubble
as a result of the Bush administration's refusal to hold them accountable”?
As the meeting ended, and the muckety-mucks began leaving the Ritz-Carlton
to be chauffered away in their Lincoln Town cars and limousines, we gave
these decision makers another opportunity to take a copy of CorpWatch’s
report, or even to talk to us directly. The vast majority kept their
blinders on and marched resolutely past.
Suddenly we saw General Carl Vuono
(ret.). Vuono is former chief of staff of the U.S. Army, and long-time president of private military
consulting firm MPRI, which is now
also an L-3 subsidiary. Pratap and Marwan rushed to try and speak with him, while a reporter and cameraman from Al-Jazeera English filmed and stood at the ready for the general’s reply. The general didn’t want to
talk, but you can see some of the footage on YouTube. You can also watch Pratap and Marwan describe their experiences on Democracy Now!, where they were interviewed live this morning.
Pratap gave the general a copy of “Outsourcing Intelligence In Iraq” – maybe
he’ll decide to have one of his staffers give it a read. We’d love to
talk, and welcome any dialogue with officials of L-3.
My hunch from last night was correct: Stanley Inc.
(also known by the name of its subsidiary Stanley Associates) is one of
the employers of contract workers who improperly viewed the passport
file of Sen. Barack Obama. It now seems that the files of Senators
McCain and Clinton were violated as well, so perhaps the speculation
about political skulduggery is unfounded.
Yet that still leaves a host of questions related to the growing
reliance of the State Department and other federal agencies on
contractors such as Stanley, which until today was far from a household
name. Yet it’s been around for more than three decades, making its
money—like the scores of other Beltway Bandits that populate the office
buildings of the Washington, DC area—from the federal spigot.
Stanley started as a maritime consultant and now provides “information technology services and solutions.” In its most recent 10-K filing,
Stanley reported getting 65% of its revenue from the Pentagon and 35%
from more than three dozen civilian agencies, most notably the State
Stanley used to be a pretty small operator, but over the past decade
it has grown at the remarkable rate of 33% a year, reaching more than
$400 million. Although the company is publicly traded, it is
majority-owned by officers, directors and employees (the latter through
an employee stock ownership plan).
While the passport contract is the one in the news, Stanley is
largely a military contractor. It brags that some 53% of its 2,700
employees have Secret or Top Secret security clearances. CEO Philip
Nolan is ex-Navy, and his board includes retired generals from the Army
and the Marine Corps. Stanley doesn’t produce weapons—it provides the
systems engineering, operational logistics and other services that keep
the high-tech war machine running.
In the 10-K filing, where it is addressing investors rather than the
public, the company is blunt about why it expects continuing growth:
“increased spending on national defense, intelligence and homeland
security” and “increased federal government reliance on outsourcing.”
In other words, its business strategy is fundamentally based on the
continuation of the “War on Terror” and the steady hollowing out of the
The company goes on to list the specific risk factors that might
affect the value of its shares. Here’s one of particular interest (see
Security breaches in sensitive government systems could result in the loss of customers and negative publicity.
Many of the systems we develop, integrate and maintain involve
managing and protecting information involved in intelligence, national
security and other sensitive or classified government functions. A
security breach in one of these systems could cause serious harm to our
business, damage our reputation and prevent us from being eligible for
further work on sensitive or classified systems for federal government
customers. We could incur losses from such a security breach that could
exceed the policy limits under our professional liability insurance
program. Damage to our reputation or limitations on our eligibility for
additional work resulting from a security breach in one of the systems
we develop, install and maintain could materially reduce our revenues.
It will be interesting to see if the passport scandal has this
negative effect, or if the federal government protects Stanley from its
Note: It’s just been reported that another company–Analysis Corporation–is also involved in the passport scandal. More on them later.
Philip Mattera is director of The Corporate Research Project,
an affiliate of Good Jobs First. The Project is a non-profit center that assists
community, environmental and labor organizations in researching and
analyzing companies and industries. Philip is also author of The Corporate Research E-Letter, and this blog is a re-posting of the November-December 2007 edition.
Chevron has recently been spending heavily on a public relations campaign titled “the Power of Human Energy” to depict itself as a leader in environmental and social responsibility. This image-burnishing effort faced a setback last month when the company was forced to pay $30 million to settle federal charges that it made illegal kickback payments to prewar Iraq in connection with crude oil purchases under the United Nations Oil-for-Food Program.
Chevron is just one of dozens of corporations that have been caught up in a move by the Securities and Exchange Commission and the Department of Justice to step up enforcement of a law prohibiting overseas bribery by U.S.-based corporations. The law—the Foreign Corrupt Practices Act or FCPA—can also be applied to foreign companies with a substantial presence in the United States. There have been reports that electronic and engineering giant Siemens, which recently paid a fine of around $300 million in a global bribery investigation by a German court, may soon be hit with FCPA charges as well.
The rise in FCPA enforcement emerged just as the prosecution of the wave of accounting scandals starting with Enron was winding down. In fact, the limited reforms enacted in response to those scandals—especially the Sarbanes-Oxley Act—have helped bring to light much of the information on which the recent FCPA cases are based. Business apologists who hoped that the public was forgetting about corporate crime now have to deal with new reminders of the sleazy aspects of commerce.
THE “BUSINESS WATERGATE”
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 FCPA in late 1977. For the first time, bribery of foreign government officials was a criminal offense under U.S. law, with fines up to $1 million and prison sentences of up to five years.
The ink was barely dry on the FCPA when U.S. corporations began to complain that it was putting them at a competitive disadvantage. The Carter Administration’s Justice Department responded by signaling that it would not be enforcing the FCPA too vigorously. That was one Carter policy that the Reagan Administration was willing to adopt. In fact, Reagan’s trade representative Bill Brock led an effort to get Congress to weaken the law, but the initiative failed.
The Clinton Administration took a different approach—trying to get other countries to adopt rules similar to the FCPA. In 1997 the industrial countries belonging to the Organization for Economic Cooperation and Development reached agreement on an anti-bribery convention. In subsequent years, the number of FCPA cases remained at a miniscule level—only a handful a year. Optimists were claiming this was because the law was having a remarkable deterrent effect. Skeptics said that companies were being more careful to conceal their bribes, and prosecutors were focused elsewhere.
Any illusion that commercial bribery was a rarity was dispelled in 2005, when former Federal Reserve Chairman Paul Volcker released the final results of the investigation he had been asked to conduct of the Oil-for-Food Program. Volcker’s group found that more than half of the 4,500 companies participating in the program—which was supposed to ease the impact of Western sanctions on Iraq—had paid illegal surcharges and kickbacks to the government of Saddam Hussein. Among those companies were Siemens, DaimlerChrysler and the French bank BNP Paribas.
THE REBIRTH OF FCPA PROSECUTIONS
The Volcker investigation, the OECD convention, the Sarbanes-Oxley law and other factors together breathed new life into FCPA enforcement. Stricter internal controls mandated by Sarbanes-Oxley have made it more difficult for improper payments to be concealed, prompting numerous companies to self-report FCPA violations in the hope of receiving more lenient treatment.
In 2005 the number of FCPA prosecutions started to pick up and reached double digits the following year. This year the number of investigations has reportedly been in the dozens, and the resolved cases have gained higher visibility. Among these have been the following:
* Three subsidiaries of British oil services company Vetco International pleaded guilty to FCPA violations in Nigeria and agreed to pay a total of $26 million in criminal fines. This was the largest criminal penalty the Justice Department had ever obtained in an FCPA case.
* Oil & gas distributor El Paso Corporation settled FCPA charges in connection with the Oil-for-Food Program and agreed to disgorge $5.5 million in profits and pay a civil penalty of $2.2 million.
* Dow Chemical paid a $325,000 civil penalty to settle FCPA charges relating to improper payments made by an Indian subsidiary in the late 1990s.
* A subsidiary of oil services company Baker Hughes pleaded guilty to FCPA charges involving bribery in Kazakhstan and paid a criminal fine of $11 million. In related SEC charges, Baker Hughes agreed to pay more than $44 million in criminal fines, civil penalties and disgorgement of profits. This became the new record for FCPA-related penalties.
* Textron Inc. paid more than $3.5 million to settle FCPA charges relating to kickback payments made by a subsidiary to obtain contracts for the sale of humanitarian goods to Iraq under the Oil-for-Food Program.
* Industrial equipment company Ingersoll-Rand agreed to pay more than $4.2 million to settle FCPA charges that four of its subsidiaries made kickback payments in connection with the Oil-for-Food Program sale of humanitarian goods.
FOREIGN COMPANIES IN THE FCPA NET
While the recent rash of FCPA cases has drawn little attention in the United States, the Siemens case has generated a major scandal in Europe. Last year, more than 200 police officers participated in a raid of company offices and homes of managers. Prosecutors in Italy and Switzerland joined in the investigation, which focused on suspicious transactions at the company’s telecommunications equipment unit reportedly totaling more than $2 billion.
The outcry over the bribery charges (and separate controversies over matters such as price-fixing) forced both the chief executive of Siemens and the chairman of its supervisory board to announce their resignation. In October the company agreed to a $300 million fine, hoping that the controversy would die down. But in November the Wall Street Journal gained access to the unpublished court ruling in the case, which provided embarrassing details about the payment of bribes in Nigeria, Libya and Russia. Subsequently, Business Week Online reported that FCPA charges in the United States could generate penalties for Siemens much harsher than what it experienced at home.
Siemens is not the only European company whose bribery problems are becoming an issue in the United States. Earlier this year there were reports that U.S. prosecutors have been investigating improper payments by major military contractor BAE Systems (formerly British Aerospace), including some reportedly involving Prince Bandar bin Sultan, former Saudi ambassador to the United States and a close ally of the Bush Administration, as well as other members of the Saudi royal family.
A quarter century after the Watergate investigation revealed a culture of corruption in the foreign dealings of major corporations, the new wave of FCPA prosecutions suggests that little has changed. There is one difference, however. Whereas the bribery revelations of the 1970s elicited a public outcry, the recent cases have generated little comment in the United States. Companies like Chevron pay their fine and go right on using their ad campaigns to present themselves as paragons of virtue. It took years for the reputation of Richard Nixon to recover from the taint of Watergate in the eyes of mainstream observers. Corporate America seems to be able to purchase instantaneous redemption.
Stolen Without a Gun reads like an Anarchist's Cookbook of Corporate Crime and illustrates well how an international money laundering scheme works (including how to nest embezzled funds in a series of quasi-legal Cayman Island bank accounts) while telling the personal tale of Walter Pavlo, Jr., a convicted white-collar criminal who was busted for embezzling $6 million while working at MCI Telecommunications in the mid-1990s.
Pavlo, who served his time in jail and now gives lectures and advice on the subject of ethics and white-collar crime, is portrayed in the book as an everyman, without any particular bent to stealing money.
The narrative gives an inside perspective of how a business person could get wrangled into a high stakes game of money laundering. Pavlo, good at his job, notices the graft and corruption all around him and sees people hiding debt in accounts that he knows will never be repaid. Millions of dollars are being thrown away all around him. All the myths that he learned in business school, "The corporation as a community run by thoughtful innovators striving to do good while doing well," are shattered before him. As he is being groomed by his superiors in the company and his rise to power begins, he realizes the upper limits of just how much money he will make in his career at MCI. And it isn't enough. Plus, his company is being ripped off by delinquent customers everyday and he is the one responsible when they don't pay up. They are all getting away with it, why can't he?
The entire scheme is viewed by the perpetrators as nothing more than a college prank, they justify it by telling themselves that no one will miss the money, and for a while no one does. They get increasingly bold and sloppy with their methods and start to go after larger customers with higher levels of oversight. It is fun to watch the dizzying high come crashing down as Pavlo realizes that he cannot keep control of all of the accounts he has been siphoning, and he is running out of shells to shuffle money under.
The book does a good job of giving a frank perspective on how the culture of graft and corruption works. The demands to collect money from his clients are so unrealistically high that Pavlo has no choice but to bend the rules to make his quota. Corporate won't tell him explicitly to shirk regulations, but it is understood. Once he sees how easy it is to break the rules, and that everyone is doing it, there isn't much ground to cover for him and his buddies to come to the realization that he could be making money for himself instead of chucking it away into delinquent accounts.
Stolen Without a Gun is a "How-To" guide for students of the U.S Racketeer Influenced and Corrupt Organizations Act (RICO) and shows that too often a white collar criminal pushes externalities on their families and friends; Pavlo loses his wife and two children and his coworkers end up in jail. In the end the protagonist goes to jail, as the cover suggests, and presumably has a change of heart about his life of crime. But a quote from the last pages of the book suggests otherwise, "Bottom line, we are...getting what we deserve. We had our eyes wide open. Our only real regret is that we got caught. Case closed."
Posted by Pratap Chatterjee on September 14th, 2007
The U.S. Securities and Exchange Commission (SEC) brought charges against 69 accountants for failing to register with the Public Company Accounting Board (PCAB) earlier this week. This somewhat obscure action is the latest ripple in the wave of crackdowns that followed the Enron accounting scandals in 2001 -- to break up the all too cozy relationship between auditors and the multinationals that they are supposed to be policing.
Governments allow companies to close their financial books at the end of the fiscal year, if a qualified accountant has signed off on it. The problem is that both the companies and the auditors are private entities whose ultimate motive is to make a profit, so there is potential for one or both of the two not to report any cooking of the books, unless they know that a regulator might catch them and discipline them. And in the last two decades, as favored accountants have been rewarded with multi-million dollar non auditing consulting gigs (such as tax planning or management consulting), the worry was that they were looking the other way in order to win more business.
Following the Enron scandal, which showed that Arthur Andersen, the company's auditor, had failed in its public duty, the U.S. Congress passed the Sarbanes-Oxley law in 2002 that replaced the accounting industry's own regulators with the Public Company Accounting Board with subpoena and disciplinary powers. Auditors are supposed to register with the board, but clearly not everyone took this seriously.
The SEC's enforcement director, Linda Chatman Thomsen, said that Thursday's action showed that the agency "is committed to ensuring compliance with the regulatory framework Congress established for auditors of public companies." A total of 50 of the errant accountants settled the charges with the federal agency the very same day.
This action is an important warning shot across the bows to let the auditors know that the SEC is checking up on them. But the jury is still out as to whether the SEC will go one step further and prosecute auditors who fail to report companies that are cooking their books.
In related news, a new study from the University of Nebraska suggests the whistle-blowers who report violations of the Sarbanes-Oxley Act to agencies like the PCAB are not properly protected. The study looked at 700 cases where employees experienced retaliation from companies for whistle-blowing and found that a mere 3.6 per cent of cases were won by employees.
Richard Moberly, the study's author, argues the findings "challenge the hope of scholars and whistle-blower advocates that Sarbanes-Oxley's legal boundaries and burden of proof would often result in favourable outcomes for whistle-blowers."
The Financial Times reports that Louis Clark, president of the Government Accountability Project, a non-profit organization that lobbies for whistle-blowers, calls the law "a disaster." Jason Zuckerman, a lawyer at the Employment Law Group, a law firm that represents Sarbanes-Oxley whistle-blowers, says: "Part of the problem is that investigators misunderstand the relevant legal standards and believe that a complainant must have a smoking gun -- that is, unequivocal evidence proving retaliation."
The debate is still on
over whether Sarbanes-Oxley is effective five years after the law was
passed, although all appear to agree it was a step in the right
direction. The proof of the pudding, they say, will be in the eating,
so we eagerly await the day that SEC puts errant accountants behind
Billy Rautenbach, a South African mining kingpin, was deported from Lubumbashi airport in the Democratic Republic of Congo (DRC) on July 18th. “He was accused of fraud, theft, corruption and violating commercial law [the expulsion document] said. He was persona non grata. He would have to leave,” writes Ben Laurence in the Sunday Times (UK).
Best known in South Africa and Botswana for his activities in assembling Hyundai cars, Rautenbach faces hundreds of charges of fraud, corruption and other crimes in his home country of South Africa (the reasons cited in the documents prepared for his deportation last week). South Africa is currently considering asking Zimbabwe to extradite him to stand trial.
But Rautenbach was also once a powerful man in the DRC. He ran Gecamines, the DRC’s state-owned copper mining company, from 1998 to 2000. At the time he was accused of under-reporting exports of sales of huge quantities of DRC cobalt when he was in charge – and diverting the profits to a company he controlled in the British Virgin Islands.
Although Rautenbach lost his job, he continues to play an important role in the mining sector, as he also happens to be a major shareholder of Central African Mining & Exploration Company (CAMEC), which won major contracts in the DRC a couple of years later.
CAMEC’s contracts were the result of an investor-friendly mining code introduced by the World Bank in July 2002. (An informative analysis of this code was done by the Bank Information Center.) While the code calls for a much-needed regulatory framework and environmental protection, it hands the responsibility for mining development to private companies.
However, it is doubtful that the Congolese public institutions charged with regulating the mining sector have the resources to carry through with it, and the World Bank certainly has not been successful in providing oversight. A memo leaked to the Financial Times in November 2006 details the World Bank’s failure to provide sufficient oversight in three major contracts made between Gecamines and international mining groups like CAMEC. Worth billions of dollars, these contracts reportedly gave these groups control over 75% of Gecamines mineral reserves. (In May 2007, the Financial Times also revealed that the World Bank withheld the findings of an inquiry into alleged mismanagement of funds in the Democratic Republic of Congo.)
More details on the business dealings of Rautenbach and CAMEC may emerge from a DRC commission that recently began a three-month review of mining contracts signed in the last decade. The commission is the first attempt of a new “democratically elected” government to investigate ongoing corruption in the DRC’s valuable mining sector. The new commission follows a string of attempts by previous governments and international financial institutions to investigate the exploitation of natural resources in the DRC.
If the commission hopes to be successful it must take a look at whose interests are being promoted/protected in the Congo and how. This would include an investigation into local elites, regional influences, international financial institutions and the powers they represent, and international corporations along with the relationships between these different actors.
History has shown that the more resources a nation or region possess, the more conflict and poverty the people of that nation are forced to endure. The DRC is the third largest country in Africa and is rich in natural resources, particularly cobalt, copper, diamonds and gold. It is home to one third of the world’s cassiterite, the most important source of the metallic element tin and holds 64-80% of the world’s coltan reserves, an ore that is the source of the metal tantalum, which is used in cell phones and other devices.
In an article for Alternet, Stan Cox quotes a miner responsible for digging the valuable cassiterite: "As you crawl through the tiny hole, using your arms and fingers to scratch, there's not enough space to dig properly and you get badly grazed all over. And then, when you do finally come back out with the cassiterite, the soldiers are waiting to grab it at gunpoint. Which means you have nothing to buy food with. So we're always hungry."
This cassiterite will inevitably end up in cheap cell phones and laptops laying abandoned in American landfills.
Despite (or indeed because of) its abundance of resources, the DRC has been plagued by conflict, famine and political instability since its independence in the 1960s. Following the end of the 30-year dictatorship of Mobutu Sese Seko (who was brought to power by the U.S. in the 1960s), the greed of neighboring countries for natural resources forced the DRC into the center of what organizations like Human Rights Watch have deemed, “Africa’s first world war.” The war resulted in the death of three to five million people, many from famine, exposure and disease.
A cease-fire ended the war in 1999, but the DRC has continued to suffer the extraction of resources and wealth through corrupt deals between local elites and international companies. A 2006 report from the London-based watchdog organization, Global Witness, describes how copper and cobalt are mined informally and illicitly exported, robbing the Congolese people of any opportunity to reduce poverty.
The new commission’s plan to revisit mining contracts between the state and private companies is a response to years of domestic and international pressure. Hopefully, once the review is completed (assuming that it is a transparent and non-corrupt process), the international companies involved will be willing to re-negotiate contracts in a way that is more beneficial to the Congolese state and its citizens. An interesting precedent was established last year in Liberia when Mittal Steel, the world’s largest steel company, agreed to step down from an unbalanced concessionary agreement made with a corrupt transitional government once a democratically elected government was in place.
This week's CorpWatch feature highlights the plight of indigenous people in Papua New Guinea, where landowners feel that they are cheated out of their resources, livelihoods, and just compensation by the world's largest gold producer, Barrick Gold.
We depend on our land. You depend on money. Money is not need, it is only a want, but it is need in western society. I live on land, which is my stomach. I grow food from this land and then I survive. But now, where can I get food?
Also, the fact that mineral deposits, including oil, copper, and gold, account for two-thirds of PNG's export earnings leaves them susceptible to the Dutch Disease, or the phenomenon wherein resource exports raise the exchange rate for a country's currency, thereby making their labor less desirable. While this only accounts for a tiny part of the negative consequences of mining, it does illustrate that even within an economic paradigm, mining carries negative consequences for 'development', especially open pit mines because they require less human labor. Large mineral exports also make countries more susceptible to corruption because of the negotiating power held with government gatekeepers.
"There is not sufficient disclosure in an
understandable form for citizens or civic groups to determine whether
they are indeed benefiting as they should according to current law in
The fact that gold is a largely useless metal (that is already hoarded and unused in large quantities) makes the destruction caused by it's extraction all the more tragic. According the No Dirty Gold Campaign, 80% of the gold is used by the jewelry industry. On average, the production of one gold wedding ring produces 20 tons of waste.
Metal prices are booming, and Canadian mining companies are taking advantage of the same prejudicial conditions to expand into all corners of the globe, manipulating, slandering, abusing, and even killing those who dare to oppose them, displacing Indigenous and non-Indigenous communities alike, supporting repressive governments and taking advantage of weak ones, and contaminating and destroying sensitive ecosystems.
Barrick's plans to "relocate" three glaciers - 816,000 cubic meters of ice - by means of bulldozers and controlled blasting, is seen by mine-opponents as symbolic of the company's utter insensitivity to the environment. As headwaters for a water basin in an arid region receiving very little rainfall, many opponents are gravely concerned for the ice. They say the mechanical action involved in moving the glaciers will irreversibly melt much of it, jeopardizing a delicate ecological balance further downstream.
While Barrick originally planned to "relocate" three glaciers to another area, since being denied their original plan, the project now aims to build an open-pit mine next to the glaciers. However, most alarmingly, since construction has started on the mine, the glaciers have been depleted an estimated 50-70 percent, according to Chilean General Office of Waters (DGA). Barrick attempted to blame global warming for the melting, but those claims have been disproven.
Mining in the U.S.
In the U.S., Western Shoshone lands now account for the majority of gold produced within the United States and almost 10 percent of world production. The scale of development is unprecedented and will leave a legacy of environmental impacts for centuries into the future.