Crimes [May Have Been] Committed

The late President Richard Nixon popularized the sentence “Mistakes were made,” when he referred to the Watergate Affair.  Most English teachers attempt to encourage their students to avoid the use of the passive voice since it often hides more than it illuminates.  Citizens are entitled to know who, what, when, how, and why, when their governments take action.  They are seldom provided with the complete story.

New York Attorney General Andrew Cuomo recently announced that four major private equity firms had agreed to adopt his Public Pension Fund Reform Code of Conduct, which among other things would end the so-called “pay to play” practices, which can be found not merely in the U.S., but throughout the world.  Under the Agreement, the aforementioned firms will “return” more than $4.5 million into the State’s Common Retirement Fund.  This amount does not amount to great deal.  Still, it remains unclear whether the U.S. Department of Justice and other regulatory bodies will pursue criminal prosecutions or regulatory enforcement acts in connection with this matter.

What makes such an arrangement attractive to both sides of the Agreement?  Both State and federal prosecutors often have difficulty proving so-called “white collar” crimes.  They must prove individuals have committed a crime “beyond a reasonable doubt” – indeed a high threshold.  The likely defendants will often be represented by the best lawyers money can buy (usually paid for by their employer, i.e. the shareholder in public corporations).  One can announce a successful outcome in a relatively short-time and at much lower cost in terms of money, resources and time than if there were a criminal prosecution – critical where there are major budgetary constraints.

The equity firms have not only protected their personnel from criminal prosecution, they have avoided the expense associated with investigating and defending any criminal or regulatory actions.  Management can return to living their lives and the firms can avoid a lot of disruption (as well as the loss of future clients and drop in revenues).

U.S. corporate law is premised on a legal fiction that limited liability business entities are often treated as “legal persons” possessing constitutional rights one might think would be limited to citizens.  In reality, such entities do not commit crimes.  They are not human and therefore lack the intent to violate the law.  Their employees break the law.  They may do so for their own personal benefit, which may also profit their employer.

If limited liability entities are found to have violated the law, they cannot be sent to prison.  Instead, the entity pays criminal or civil fines.  Seldom are such fines paid by the individuals who committed the offense; the costs are ultimately borne by the individual investors, who in most cases have not committed any wrongful acts.

This situation can produce situations that can inflict extreme consequences for the U.S. economy – particularly when multinational corporations and other structures are involved.  Until recently, multinational institutions and most governments had faith in the U.S. model of corporate government.  This model was offered as the solution to the economic problems of the developing world.  The past 12 months has demonstrated that such faith was misplaced.

Previously, the countries that were on the verge of economic collapse, most economists gave the same advice to foreign governments: (i) privatize industry, (ii) reduce regulations, (iii) encourage foreign investment , (iv) strengthen corporate governance, (v) diversify your economy, particularly those sectors that exported, and (vi) fight inflation.  Seldom does one size fit all.

Unfortunately, the above advice lacked three critical components: (i) making corporate employees personally liable, (ii) strengthening regulatory enforcement and the rule of law, and (iii) promoting civil society (non-governmental organizations) and non-state media.  Experts in economic development are generally in agreement on the importance of such policies. 

Yet, if a developing country’s economy rebounds, the principal beneficiaries are often: (i) foreign lenders of capital (obtaining repayment of loans made without a proper sense of risk), (ii) government officials (corrupt or otherwise as they draw steady salaries) and (iii) the upper strata of a country’s society.  What is absent are accountability and equity.

Perhaps in the future, the standard mantra for dealing with economic crisis may vary.  Make senior management and board members personally accountable both financially and criminally, (when appropriate) for the actions of the corporations they manage and reward “whistleblowers” to uncover corporate fraud and other wrongdoing.

The U.S. with disappointing results enacted the Sarbanes-Oxley Act as the panacea for improving corporate governance.  The Act’s passage may have lulled regulators and investors into complacency.  An effective check and balance system essential for effective corporate governance was not mandated.  This is an important lesson both for the U.S. and foreign governments.

This may not seem as Herculean and naïve a goal as it might first appear.  Large entities (corporations, governmental bodies, individual professionals (accounting and law firms as well as banks) and international organizations) experience a steady stream of turnover.  Individuals are far more likely to be whistleblowers against their former employers.

The great uncertainty remains the willingness of governments to enforce the law.  This takes political willpower.  This is often lacking as a result of the need of politicians to raise money for their campaigns and the power of elite groups who can quell both new requirements as well as their enforcement.  The only way to counteract this situation is to shame both government officials and those others that profit from the system.