Cracking Down on Corporate Crime, Really

Here is one of the most remarkable aspects of the still-unfolding financial scandals swirling around Worldcom, Xerox, Global Crossing, Enron, Arthur Andersen, Tyco and a growing number of other companies: The fraud occurred in the most heavily regulated and monitored area of corporate activity.

If an epidemic of corporate malfeasance could occur in the financial arena, how serious is the more general problem of corporate crime?

Consider the checks and balances in place that should have stemmed the wave of corporate wrongdoing which has reportedly angered even American CEO George Bush:

• Disclosure requirements for corporate financial performance are extensive, and by far the most detailed for any element of corporate activity.
• There is a distinct industry -- made up of accounting firms -- whose function is to review the financial numbers, audit corporate books and certify the validity of financial statements.
• There is another distinct industry, separate from the accountants -- this is the Wall Street investment firms -- whose function is to scrutinize the corporate reports, interview corporate executives, analyze market performance and provide investors with independent evaluations of company prospects.
• There is a legal duty for corporate executives to advance the interest of an important and powerful class of people -- shareholders -- and significant numbers of these shareholders are increasingly organized and assertive of their rights (including through pension funds). There is no comparable legal duty for corporate executives to serve consumer or worker interests, say.
• An array of Securities and Exchange Commission regulations establish rules for financial reporting, and are backed by the enforcement power of the agency, as well as the threat of private litigation from shareholders in case of violation.

Other aspects of corporate activity are simply not subject to such robust scrutiny and control.

Given what is now the apparent blatant corporate disregard for the law, even in areas where executives are most closely watched, what should we expect is occurring elsewhere? What's happening with consumer rip-offs, sales of unsafe products, endangerment of workers, pollution of the environment?

Even with inadequate law enforcement, reporting requirements or organized countervailing institutions, we know enough to know that the epidemic of corporate crime, fraud and abuse is at least as severe outside of the financial arena as within.

To take just two examples from recent months: In May, drug maker Schering-Plough signed a consent decree with the Food and Drug Administration, agreeing to pay a record $500 million in connection with charges that over a three-year period it produced about 125 different prescription and over-the-counter drugs in factories that failed to comply with good manufacturing practice. And in April, the Justice Department announced that it collected more than $1.3 billion in 2001 in connection with enforcement actions related to health care fraud, and that last year 465 defendants were convicted for health-care fraud crimes. This kind of revelation occurs regularly, but news accounts rarely combine them -- as they are now doing with the financial scandals -- to make clear the breadth and depth of the problem.

With the most recent round of disclosures of financial wrongdoing at Worldcom and other companies, it no longer appears that Big Business's Congressional allies are going to be able to block all meaningful remedial measures, and the Bush administration is now preparing a reform package.

If those reforms are limited to addressing financial fraud, however, the biggest and most serious corporate criminal activity will be able to flourish.

What we need is a full set of restraints on corporate crime. But even small steps could significantly reduce the toll of corporate crime and violence. Here are three measures that should be adopted this year, before Congress recesses and momentum for corporate reform slows:

First, the Federal Bureau of Investigation should be required to compile an annual report on corporate crime in American, to accompany its current Crime in the United States report, which is unfortunately confined to street crime.

Second, the federal government should refuse to do business with companies that are serious and/or repeat law breakers, as well as deny other privileges (for example, granting broadcasting licenses) to corporate criminals. This would involve some new or strengthened laws and regulations, as well more stringent enforcement of debarment, contractor responsibility and good character laws now on the books. States and local governments should adopt similar measures.

Third, whistleblowers and private citizens should be able to enforce laws regulating corporate conduct. One way to facilitate this enforcement approach would be to expand and creatively adapt the False Claims Act, which currently enables whistleblowers to initiate lawsuits against entities which have defrauded the government, and which reclaims for the government every year hundreds of millions of dollars stolen by unethical contractors.

"Cracking down on corporate crime" -- the mantra of the moment -- cannot be limited just to financial crime, already the most policed form of corporate wrongdoing.