Drip, Drip, Drip: Eroding the Barriers to Corporate Crime

The collapse of Enron is a story far too rich to be reduced to a single story line.

But one crucial narrative is how a series of seemingly small and technical decisions purchased in Washington, DC eventually combined to enable Enron's implosion--and how recent and evolving policy decisions are paving the way for future Enron-level disasters.

Consider the following: In 1995, the accounting industry's powerful lobby muscled through Congress the Private Securities Litigation Reform Act. Under this accountants' immunity law, it has become much harder to sue accounting companies for signing off on bad financial reviews, removing an important check on the accountants at Andersen and in the rest of the industry.

As accounting firms decided in the 1990s that they wanted to shed their stodgy image and solid profitability for the super-profitability of the high-flying financial hipster elite, conflicts of interest emerged between the firms' audit function and the lucrative consulting business. To win and maintain consulting contracts, companies like Andersen have an incentive to go easy when they are auditing companies like Enron. Former Securities and Exchange Commission (SEC) Arthur Levitt sought to impose a regulatory prohibition on firms working as auditors and consultants for the same clients. But the accounting industry's money blotted out his prudent proposal, as Congress made it clear it expected no such regulatory prohibition to be put in place.

In 1997, Enron obtained from the SEC an exemption from a law that would have prevented the company's foreign operations from shifting debt off their books and barred executives from investing in partnerships affiliated with the company, according to the New York Times. If Enron had not finagled this exemption, negotiated for Enron by a former director of the investment management division at the SEC, the company would have been prohibited from engaging in many of the financial shenanigans that led to its collapse.

Drip. Drip. Drip. Thus did a series of incremental regulatory and deregulatory actions and non-actions--of which this is only a small sampling--erode the law-and-order barriers to the commission of Enron and Andersen's corporate crime and abuse.

The Enron revelations have not stopped this steady dribble.

Case in point: In late December of this past year, the Bush administration struck from the books a regulation that had considerable potential to deter corporate crime.

In a Christmas mini-coup, the administration repealed an anti-scofflaw rule that would have given federal contracting officials authority to deny contracts to repeat law-breaking corporations.

The contractor responsibility rule had been enacted following a tortuous process. Then-Vice President Al Gore floated the idea in 1997. A concerted campaign against the proposal led the administration to keep it on hold until 1999, when the Clinton White House formally issued clarifying rules to put the proposal into effect. Another corporate outcry led to it being put back on ice. Finally, the Clinton administration included the anti-scofflaw rule in the raft of regulations issued in its final days.

The rule went into effect on January 19, 2001. The Bush administration suspended implementation on January 20. The Christmas coup--repealing the rule altogether--was the last chapter in the defeat of the rule.

The Chamber of Commerce applauded the repeal of the rule, which it had, spectacularly, denigrated as "blacklisting." In the fanciful scenario spun by Randel Johnson, Chamber vice president for labor and employee benefits, under the anti-scofflaw rule, "government agents could have wielded virtually unlimited power."

Although Johnson and the business opponents of the anti-scofflaw rule wildly exaggerated the potential scope of the rule, the rule's common sense direction that government contracting officers should exercise caution before contracting with recidivist corporations would have exerted some deterrent effect on corporate law-breaking.

And the rule did pose a threat to more than a few corporations. Multinational Monitor magazine found that nine of the top 100 corporate criminals of the 1990s were among the 200 largest federal government contractors in 1998, and that of the 50 largest defense and non-defense contractor, 20 had received more than 10 "serious" citations from the Occupational Safety and Health Administration. The General Accounting Office (GAO), the congressional research agency, has found that 261 federal contractors, receiving more than $38 billion in federal government business in fiscal year 1994, received penalties of at least $15,000 for violating OSHA regulations, and that 80 federal contractors, receiving more than $23 billion in federal government business in fiscal year 1993, had violated the National Labor Relations Act. (See http://www.essential.org/monitor/mm1999/99july-aug/crime.html.)

For some large companies, the prospect of endangering government contracts would have been sufficient to prod them to greater respect for the law. But the administration's concern for law-and-order or individual responsibility evidently does not extend to corporations.

Sometime in the future, when another Enron-scale corporate debacle breaks into the front pages, it will be possible to look back to December 2001, and point to the repeal of the contractor responsibility rule as an enabler of the corporate criminals.

Drip. Drip. Drip.

Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter. Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor. They are co-authors of Corporate Predators (Monroe, Maine: Common Courage Press; see http://www.corporatepredators.org). To subscribe to weekly corp-focus e-mail service, send an e-mail message to listproc@essential.org with the following all in one line: subscribe corp-focus 'your name' (no period).

(c) Russell Mokhiber and Robert Weissman