Tuesday, January 14, 2014


By Ronald Fox

NOTE:  I'm resending this posting, with some minor editorial revisions.  A complete revision, with a different conclusion, will accompany the re-posting.

On November 13, I posted an essay which argued that fines alone, however stiff, would not be enough to deter criminal corporate misdeeds. My case in point was JPMorgan Chase’s (JPMC) latest fine of $13 billion for bond fraud. Last week’s announcement that JPMC will pay an additional $2 billion in penalties for two felonies involving its failure to comply with the Bank Secrecy Act and alert federal authorities of suspicious activities by Bernard Madoff, whose Ponzi scheme was laundered almost exclusively through various accounts held at JPMC, brings the total the bank will have paid out to resolve various government investigations in the last 12 months to some $20 billion. Despite the magnitude of JPMC illegal activities, and the obvious strength of the government’s case against the company, no JPMC employee has yet faced criminal prosecution. It seems banks can commit crimes, but not bankers.

Twenty billion in fines sounds large, but as I mentioned in my previous post, it only scratches the surface of JPMC’s enormous wealth. The company has $2.4 trillion in assets and is projected to make $23 billion in the coming year alone. To restate my point: fines alone will not be enough to deter the criminal wrongdoing that gets JPMC, and other Wall Street behemoths, in legal hot water. (It is estimated that sixteen Wall Street banks could ultimately pay up to $50 billion to resolve government investigations over mortgage fraud alone.) To the big banks, such fines are now seen simply as a cost of doing business. 

Isn’t it about time some banker heads roll? And, what about even stiffer punishments for the banks, like forbidding certain kinds of business activities, breaking up companies that are too big to fail or jail, and even revoking a company’s charter (yes, the ultimate death sentence)?

There are signs that government might be inching toward getting tougher on corporate criminality. JPMC’s Madoff settlement also includes a so-called deferred prosecution agreement. Under this agreement, the government will suspend an indictment for two years as long as JPMC acknowledges the facts in the case, pays a fine, and overhauls its controls against money laundering. This isn’t a criminal indictment, but it’s an infrequent action for government to take against a giant American bank (I stress the word "giant" since deferred prosecution agreements, and their more lenient cousins, non-prosecution agreements, have been made with smaller banks). Prosecutors allegedly considered a harsher punishment, including criminal prosecution, but decided not to, apparently, according to the New York Times, because such an action might jeopardize JPMC’s charter as a national bank. Lose its charter? Is this so unfathomable? Just how criminal and consequential does a corporation’s behavior have to be for a charter revocation to be seriously considered?

In their original American manifestation in the 19th Century, the privilege of incorporation was granted selectively to enable activities that would benefit the public interest. Chartering state legislatures imposed conditions for incorporation. These conditions varied from company to company and state to state, but generally embodied the common principle that a corporation’s activities must serve a public good. Charters had time limits and could be revoked if a corporation did not fulfill the specified conditions.

As corporations grew more powerful, spurred on by the 1886 Supreme Court case of Santa Clara County v. Southern Pacific Railroad, which held that a corporation was a “natural person,” governments and courts became easy prey. Corporations would proceed to enjoy the rights and privileges of incorporation, but pay little heed to the social responsibilities that came with chartering. Nevertheless, many of the original public obligations remain in state granted charters waiting for some outraged citizens to launch a campaign to enforce long dormant charter stipulations, including even a revocation in cases where particularly egregious corporate behavior has occurred. Wouldn’t that be interesting?

So for now, financial penalties remain the primary penalty for corporate crime, even though there is no evidence that fines alone will promote greater corporate respect for the law. Things may be changing, however.  Maybe next time JPMC and other corporate crooks won’t be able to escape criminal prosecution. Maybe it will happen sooner than we think, given the current federal bribery investigation of JPMC’s hiring of the children of China’s ruling elite, in violation of the Foreign Corrupt Practices Act, which bans U.S. corporations from giving something of value to foreign officials to gain “an improper advantage” in retaining business.

Though there's a long way to go, and there are reasons to be skeptical, the times may be a changin' for the anything goes corporate culture.

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