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Jewish World Review March 31, 2002 / 18 Nisan, 5762

Amitai Etzioni

Amitai Etzioni
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Consumer Reports

Scandals will end when penalties fit crimes | On Monday, a Senate committee sent out more subpoenas to former Enron board members seeking to question them about their contacts with the administrations of George W. Bush and Bill Clinton.

This is just the most recent action taken in the Enron debacle by Congress members, who have held numerous hearings and introduced dozens of legislative proposals to reform everything from the way investors are protected to pension plans. President Bush also weighed in with his recent 10-point program that has a lot of good dos and don'ts for CEOs and auditors.

All that is missing are serious penalties - not only for corporations, but also for the individuals who run them. Until we impose harsher penalties that better fit white-collar crimes, nefarious corporate conduct will continue largely unchecked.

More than a decade ago, the U.S. Sentencing Commission was asked to study corporate offenses and come up with a tough set of penalties. The proceedings still speak volumes because little has changed since then. That was the last attempt to tackle corporate crime.

In 1987, the panel first studied the prevailing penalties and found that between 1984 and 1987 the average fine on multibillion-dollar corporations was a mere $48,000 and that in 67% of the cases, the companies were fined less than $10,000.

The commission then held hearings, in which I testified, about what would be just penalties. Ultimately, in 1989, it drafted a 32-level scale of fines ranging from two to three times the amount of damage caused or illicit gains achieved. Fines could range up to a third of a billion dollars - certainly enough to get the attention of even the largest corporations with the deepest pockets.

Just before these recommendations were subject to a public hearing, on Feb. 14, 1990, all hell broke loose. According to news stories and my colleagues on the commission, many angry corporate leaders called the first Bush White House, which alerted the Justice Department. The commission quickly backpedaled, scaling back the penalties by some 97%. The new maximum penalty was dropped to $12.6 million (it since has increased, but remains far less than the commission first had proposed).

The commission also made it easier for corporations to reduce their fines even more based on a set of mitigating factors. For instance, if a corporation had an effective compliance program, it could subtract three points from its culpability score and possibly reduce its fine by more than 30%. (There are also factors that increase a culpability score.)

Little wonder corporate executives are not losing sleep over what might happen if it is found that they crossed the line. During the past 10 years, fines imposed on corporations have increased some, but are still relatively modest:

  • In June 2001, Sara Lee Corp. pleaded guilty to "producing and distributing adulterated meat and poultry" and was fined $200,000.
  • In 1996, Archer Daniels Midland pleaded guilty for its role in "conspiracies to fix prices to eliminate competition and allocate sales in the lysine and citric acid markets worldwide" and was fined $100 million. The corporation's net sales and other operating income amounted to nearly $18 billion in the same year.
  • In an article for Multinational Monitor, Russell Mokhiber, editor of the Corporate Crime Reporter, produced a list of what he called "the top 100 corporate criminals of the 1990s." Just 10 corporations had imposed penalties of $50 million or more; 71 were fined $10 million or less, including 16 that were fined less than $1 million.

In addition to fines, executives can also be personally held accountable. Indeed, in the case of Archer Daniels Midland, the 7th Circuit Court of Appeals ruled that the original two-year prison sentences of a former company division chief and a former vice chairman were not long enough. A federal judge added nine months and one year, respectively, to the two executives' sentences.

However, such prosecution is extremely rare, according to Terry Lenzner, chairman of Investigative Group International.

It remains to be seen - given the shredding, the high-powered lawyers and the invocation of the Fifth Amendment - whether any of the Enron executives are going to be charged with anything, let alone be convicted. If not, it, of course, would only reinforce the business-as-usual message to all other executives who are skating close to the edge, or well on the other side of it.

One could make the argument that Enron, now in reorganization, could go out of business. But that is not a result of any legal penalties; instead, it's based on questionable business practices.

Similarly, Enron's auditing firm, Arthur Andersen, was indicted by the federal government this month, which could lead to its demise. But perhaps with tougher action earlier on, Andersen could have been saved. Andersen was given relatively small fines for other violations, which in effect emboldened it to take more risky action, leading to its indictment now.

The Bush administration's promise to enact various new regulations means little if these regulations do not include serious penalties to be imposed on those corporations and executives who work their way around them. Enacting new regulations is a set piece of political theater. They look like a big deal and are supposed to assuage the worried general public, but leave the friends of the administration in the business community free to continue their business more or less as before.

It is time for Congress to resurrect the U.S. Sentencing Commission's initial penalty scale. White-collar crime will stop when executives, and their companies, understand that they will pay a real price for their transgressions.

JWR contributor Amitai Etzioni, of George Washington University, is the author of, among others, The Limits of Privacy. Comment by clicking here.

02/03/15: A former White House staffer's plea to Congress: A presidency needs privacy
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12/13/01: Homeland defense is best option for volunteerism
11/11/01: Can we force democracy on the Afghans?
11/08/01: How not to win the war
10/01/01: Problems with the new antiterrorist agenda is not that it is too grand, but that it is not grand enough
09/21/01: Either U.S. forces should strike back hard or we'll lose our freedoms
09/05/01: Communities, not the president, must enact morality
08/23/01: Economists fail as forecasters
08/09/01: Live from Washington it's . "Everyone's a Criminal"
07/27/01: Condit case illustrates the need to rein in fast-talking lawyers playing verbal acrobatics with the truth
08/01/01: Shouting 'Big Brother' in a crowded society

© 2001, Amitai Etzioni