CGBE Handout # 4

Corporate Crime
Corporate crime refers to crimes committed either by a corporation (i.e., a business entity having a separate legal personality from the natural persons that manage its activities), or by individuals that may be identified with a corporation or other business entity. Corporate crimes also implies frauds committed by entities to willfully erode shareholder value. Corporate mis-governance and misconduct also amount to corporate crime. Criminal behavior in most jurisdictions include: insider trading, antitrust violations, fraud (usually involving the consumers), damage to the environment, exploitation of labour in violation of labor and health and safety laws, and the failure to maintain a fiduciary responsibility towards stockholders.
Corporate crime overlaps with:
white-collar crime, because the majority of individuals who may act as or represent the interests of the corporation are employees or professionals of a higher social class;
organized crime, because criminals can set up corporations either for the purposes of crime or as vehicles for laundering the proceeds of crime. Organized crime has become a branch of big business and is simply the illegal sector of capital. It has been estimated that, by the middle of the 1990s, the "gross criminal product" of organized crime made it the twentieth richest organization in the world -- richer than 150 sovereign states (Castells 1998: 169). The world’s gross criminal product has been estimated at 20 percent of world trade; and
state-corporate crime, because, in many contexts, the opportunity to commit crime emerges from the relationship between the corporation and the state.
Examples of corporate crime:
Money laundering: Financial transactions in which identity, source and destination of money are concealed.
Bribery
Corruption
Evasion of Foreign Exchange regulations
Falsification of Accounts
Misappropriation of depositors’ money
Ballooning of executive remuneration

Reasons behind corporate crime
Excessive power in the hands of Management: Due to separation of ownership and control, Management has assumed enormous power. And as the adage goes –Power corrupts and absolute power corrupts absolutely –excessive power in the hands of Management often results in misuse of executive power.
Instances of gross misuse of executive power are as under:
Expropriation of investors’ funds (by simply taking out money and putting it elsewhere from where it may be easily taken out)
Transfer Pricing mechanism: internal price charged for a product or service by a selling division to a buying division within the same organization.
Rise in perquisites of higher level officers
Irrational expansion of firms
Abuse of democratic processes
Abuse of workers
Abuse of stakeholders (overlooking their claims in corporate accountability process)
Abuse of consumers
Environmental abuse
Abuse of third world: dumping, selling sub-standard/banned products etc.

Short-term orientation: Since the membership of the board has a definite tenure, most of the BOD members work towards short-term goals/benefits.

Lack of public understanding: People generally lack understanding of issues pertaining to unsafe working conditions, violation of consumer laws, environmental degradation etc. Hence they fail to raise a hue and cry. Most of the cases of corporate crime thus go unnoticed.

Statutory Inadequacies: There is no legal provision to take punitive action against companies. Punishments like death sentence, life imprisonment, imprisonment for short term etc cannot be imposed upon an erring company.

Problems of Externality: This leads to by-passing of social responsibilities by corporations. Due to imperfect markets, profit maximizations does not lead to maximization of social wealth. Firms tend to maximize their profits by externalizing most of their costs on the third parties. As a result, environmental concerns also take a back seat.

Bureaucratic structures: Loopholes in the bureaucratic structures also contributes to corporate crime though quite indirectly.

Greed and lax control mechanism.

Preventive measures:
Systemic improvement:
Responsibility structures
Fraud-risk Assessment
Employee Awareness
Community Awareness
External Notification
Internal Reporting Structures
Policies, Standards and Procedures on Conduct and discipline

Legal Action as a deterrent

Business Etrhics as an antidote to corporate fraud
Whistle-blowers’ protection
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Corporate Crime: Indian Experience
By Nityanand Jayaraman
(Source: http://www.combatlaw.org)
In India, the pattern of corporate crime is almost the same as in any other part of the world. Efforts to tackle such crime are grossly inadequate. Only 4 percent of the white-collar criminals get convicted in the Supreme Court, according to a PTI report of November 2003 that quotes C.L. Ramakrishnan, former director of Vigilance and Anti- Corruption. The report also notes that "criminals escape with fines of few thousand rupees for offences running to several hundred crores." Criminal charges seldom reach the stage of sentencing. The Union Carbide case in Bhopal presents a classic example of corporate crime gone unpunished. Union Carbide Corporation's status as a US multinational, no doubt, added a further complicating factor. Immediately after the disaster, the US courts refused to hear the plaints for compensation filed by Bhopal victims on grounds that the forum (in the US) was inappropriate given the robustness of the Indian judicial system. The US court, instead, exhorted Carbide and its officials to cooperate with Indian authorities. The company and its chief executives did nothing of that sort. They fled to seek refuge in their home country to escape liability that could arise from their crimes in Bhopal if convicted. Both Union Carbide and Warren Anderson, the chairman of Union Carbide at the time of the disaster, are proclaimed absconders by the Chief Judicial Magistrate's court in Bhopal for their failure to honour summons issued by the court. Both Carbide and Anderson face charges of "culpable homicide not amounting to murder" and other crimes. A notice of extradition for Warren Anderson was served more than 10 years after the order seeking his extradition was given. The US Government is yet to respond to the request. In the meantime, Carbide has added insult to injury by reappearing in India, albeit in proxy. In February 2001, the company merged with US-based Dow Chemical. Although Dow acquired Carbide with full knowledge of the latter's pending criminal and civil liabilities in India, Dow has made clear that it will not address any of Carbide's Bhopal liabilities. So certain is it about its position and security of its assets that Dow has opened several offices in India, including the manufacture and marketing of Dursban (chlorpyriphos), a deadly pesticide, in collaboration with National Organic Chemcials Industries Limited (NOCIL). Meanwhile the Indian Government seems in no hurry to challenge Dow's version of law. At least part of the blame for the predicament we find ourselves in lies with the fact that our society sees a corporate criminal as undeserving of the strict punishment meted out to common criminals. Senior corporate executives, like Warren Anderson, who make decisions that kill, poison or rob people often pass off for respectable law-abiding citizens. Unlike the stereotypical common criminals, the top directors of corporate criminals - even convicted criminals - often smell good, drive expensive cars and can legitimately gain access to the policy-making circles of the world governments. When corporate crimes involve premeditated murder, as in the case of Dubey, the law is clear on the fate of at least the human perpetrators. But what about poisoning that results from wilful negligence? Not all corporate criminals set their goons to murder those who stand in the way of their money. Some like Mangalam still exhibit the same depraved indifference to human life and environment in their pursuit for money that they subsidise their production by feeding off the health of the communities and the environment. The courts are clear about murder, but seem confused about whether or not a little poisoning is inevitable and should be allowed in the interests of "development."