Ending corporate larceny: Allow regulators to do their job

Encompassing the globe and engulfing every sector, unbridled capitalism has given way to rampant corporate larceny. Volkswagen in Germany, Orix Corporation in Australia, Petrobras in Brazil, Toshiba in Japan, Lehman Brothers in the United States, Satyam Computers in India represent a short list of global corporations that have indulged in rouge conduct, boorish behaviour and dubious corporate practices in the past decade.

Employees, taxpayers, consumers and shareholders have paid dearly for what are essentially criminal acts by corporate honchos. Fat cat executives, especially in companies that are too big to fail, are pushing the limits of law and accounting standards, circumventing rules and regulations to gain market share, post bogus revenues and fictitious profits. In turn, it allows them to preserve their company’s dominant position while boosting their own pay checks and bonuses.

The numbers are staggering and the time frame astonishing. Volkswagen is still counting the number of cars fitted with special software that allowed it overcome stringent emission requirements and cheat the regulators. Starting the operation in 2009, current estimates of installed vehicles run in the north of 10 million cars while the company is expected to cough up at least $ 18 billion in fines.

The Chief Executive Officer of Orix Corporation is supposed to have paid more than half a million dollars in bribes while illegal payment of commissions has gone on for years.
The Petrobras scandal has cost the Brazilian taxpayers dearly and shareholders have lost 80 per cent of their investment while the company reported a loss of $7.2 billion in 2014.

The scandal dates back to 2003 when a group of 27 construction companies formed a cartel and inflated contract values enabling them to steal billions of dollars and make massive payoffs to politicians.

Executives at Toshiba understated costs of long term projects allowing them to inflate profits by more than $ 1.2 billion between 2008 and 2014. The Satyam Computers accounting scandal was a body blow to the widely regarded Indian software industry.

The company overstated revenues, recorded fictitious revenues on bogus contracts and inflated profits by over a billion dollars for over a decade.

Lehman Brothers hid sub-prime loans for years by an accounting legerdemain and its subsequent bankruptcy wiped out more than $ 46 billion of market capitalisation.

The list of corporate transgressions and white collar pilfering is indeed a lengthy one. With lax and lenient regulations across countries, acquiescent and submissive boards in corporations, complacent and derelict auditors as public watchdogs, powerful executives have led their global corporations on the path of avaricious greed.

The irony in many of these blatant and fraudulent white collar crimes is that corporations have paid fines, humongous in some cases, but nevertheless have survived with government assistance while executives have gone unpunished or served really short sentences.

Across countries, regulatory frame work needs transformation for ending sophisticated corporate larceny. The United States has increasingly adopted aggressive tactics to combat white collar crime like wiretaps, sting informants and undercover operations akin to those used in organised crime.

Having failed to prosecute high-level participants of the 2008 financial crisis for want of evidence, enforcement officials at the Department of Justice changed their approach to white collar criminal investigations and individual prosecutions.

Criminal wrongdoing

The “Yates Memorandum” as it is now popularly known, expects prosecutors to go after specific employees for criminal wrongdoing. Some of the measures include cooperation between criminal and civil investigators, corporations identifying culpable individuals and creative use of existing laws. Indeed, these measures should be emulated by other countries to end the scourge of corporate larceny and successful locking up of white collar criminals for years.

As India opens up to more foreign direct investment and aspiring to be the global manufacturing destination, there are plenty of lessons for government and regulators from corporate fiascos around the world. No automobile emission standards, lax food regulations, poor financial guidelines and negligent pharmaceutical codes are all pervasive in our country.

And there are too many regulators who bark but never bite. Serious Frauds Investigation Office modelled after the hallowed UK Serious Fraud Office is a poster child of ineffective regulator with no successful prosecution to its credit.

So has been another holy cow regulator – the Company Law Board. Insurance and telecom regulators are impotent bodies incapable of upholding consumer rights. The Central Drugs Standard Control Organisation, the pharma industry czar, is ineffective in preventing spurious drugs from entering the market.

And the Securities Appellate Tribunal’s (SAT) scathing remarks on SEBI recently for not following due process in the DLF case and many others does no good to the reputation and credibility of the stock and commodity markets regulator.

The Competition Commission of India is the lone exception having swiftly clamped down on dominance and cartelisation in several industries by threatening companies and imposing hefty fines.

A competitive market economy is the most efficient and effective way of creating and distributing wealth. Powerful executives are bound to push legal limits and skirt regulations to preserve leadership position and participate in corporate larceny.

Regulators across the globe need to strengthen regulations, be vigilant and exhibit the necessary resolve and wherewithal to successfully prosecute criminal conduct of both individuals and corporations.

For the greater good of market economy and capitalism to flourish, it is important that political establishment not show favou-ritism and allow regulators to do their job.

(The writer is a Bengaluru-based money manager)​