Home' Trinidad and Tobago Guardian : August 31st 2014 Contents AUGUST 31 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG15
Who runs the world s most lucrative
The Sicilian mafia?
The People s Liberation Army in China?
The kleptocracy in the Kremlin?
If you are a big business, all these are less grasping than
America s regulatory system. The formula is simple: find a
large company that may (or may not) have done something
wrong; threaten its managers with commercial ruin, preferably
with criminal charges; force them to use their shareholders
money to pay an enormous fine to drop the charges in a secret
settlement (so nobody can check the details). Then repeat
with another large company.
The amounts are mind-boggling. So far this year, Bank of
America, JPMorgan Chase, Citigroup, Goldman Sachs and
other banks have coughed up close to US$50 billion for sup-
posedly misleading investors in mortgage-backed bonds.
BNP Paribas is paying US$9 billion over breaches of American
sanctions against Sudan and Iran. Credit Suisse, UBS, Barclays
and others have settled for billions more, over various accu-
sations. And that is just the financial institutions. Add BP s
US$13 billion settlement over the Deepwater Horizon oil spill,
Toyota s US$1.2 billion settlement over alleged faults in some
cars, and many more.
In many cases, the companies deserved some form of pun-
ishment: BNP Paribas abetted genocide, American banks
fleeced customers with toxic investments and BP despoiled
the Gulf of Mexico. But justice should not be based on extortion
behind closed doors. The increasing criminalisation of corporate
behaviour in America is bad for the rule of law and for cap-
Until just over a century ago, the idea that a company could
be a criminal was alien to US law. The prevailing assumption
was, as Edward Thurlow, an 18th-century Lord Chancellor of
England, had put it, that corporations had neither bodies to
be punished nor souls to be condemned, and thus were inca-
pable of being "guilty."
But a case against a railway in 1909, for disobeying price
controls, established the principle that companies were respon-
sible for their employees actions, and America now has several
hundred thousand rules that carry some form of criminal
penalty. Meanwhile, ever since the 1960s, civil "class action
suits" have taught managers the wisdom of seeking rapid,
discreet settlements to avoid long, expensive and embarrassing
The drawbacks of America s civil tort system are well known.
What is new is the way that regulators and prosecutors are
in effect conducting closed-door trials. For all the talk of pub-
lic-spiritedness, the agencies that pocket the fines have become
profit centers: Rhode Island s bureaucrats have been on a
spending spree courtesy of a US$500 million payout by Google,
while New York s governor and attorney general have squabbled
over a US$613 million settlement from JPMorgan. And their
power far exceeds that of trial lawyers. Not only are regulators
effectively judge and jury as well as plaintiff in the cases they
bring; they can also use the threat of the criminal law.
Financial firms rarely survive being indicted on criminal
charges. Few want to go the way of Drexel Burnham Lambert
or EF Hutton. For their managers, the threat of personal
criminal charges is career-ending ruin.
Unsurprisingly, it is easier to empty their shareholders
wallets. To anyone who asks, "Surely these big firms wouldn t
pay out if they knew they were innocent?" The answer is:
oddly enough, they might.
Perhaps the most destructive part of it all is the secrecy
and opacity. The public never finds out the full facts of the
case, nor discovers which specific people---with souls and
bodies---were to blame. Since the cases never go to court,
precedent is not established, so it is unclear what exactly is
illegal. That enables future shakedowns, but hurts the rule of
law and imposes enormous costs. Nor is it clear how the reg-
ulatory booty is being carved up.
Governor Andrew Cuomo of New York, who is up for re-
election, reportedly intervened to increase the state coffers
share of BNP s settlement by US$1 billion, threatening to wield
his powers to withdraw the French bank s license to operate
on Wall Street. Why a state government should get any share
at all of a French firm s fine for defying the federal government s
foreign policy is not clear.
The best thing would be for at least some of these cases
to go to proper trial. Then a few of the facts would spill out.
That is hardly in the interests of the regulators or their man-
agerial prey, but shareholders at least should push for that.
Two senators, Elizabeth Warren and Tom Coburn, have put
forward a bill to make the terms of such settlements public,
which would be a start. Prosecutors and regulators should also
be required to publish the reasons why, given the gravity of
their initial accusations, they did not take the matter all the
way to court.
In the longer term, two changes are needed to the legal sys-
tem. The first is a much clearer division between the civil and
criminal law when it comes to companies. Most cases of cor-
porate malfeasance are to do with money and belong in civil
courts. If in the course of those cases it emerges that individual
managers have broken criminal law, they can be charged.
The second is a severe pruning of the legal system. When
America was founded, there were only three specified federal
crimes: treason, counterfeiting and piracy. Now there are too
many to count. In the most recent estimate, in the early 1990s,
a law professor reckoned there were perhaps 300,000 regulatory
statutes carrying criminal penalties; a number that can only
have grown since then.
For financial firms especially, there are now so many laws,
and they are so complex (witness the thousands of pages of
new rules resulting from the Dodd-Frank reforms), that enforc-
ing them is becoming discretionary.
This undermines the predictability and clarity that serve as
the foundations for the rule of law, and risks the prospect of
a selective---and potentially corrupt---system of justice in which
everybody is guilty of something and punishment is determined
by political deals.
America can hardly tut-tut at the way China s justice system
applies the law to companies in such an arbitrary manner
when at times it seems almost as bad itself.
@2014 The Economist Newspaper Ltd. Distributed by
the New York Times Syndicate
The criminalisation of
The public never finds out the full facts of the case, nor discovers which specific people---with souls and
bodies---were to blame. Since the cases never go to court, precedent is not established,
so it is unclear what exactly is illegal.
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