by Russell Mokhiber
Editorial: Remembering Bhopal
The Front: West’s Information Empire
Interview: Parasites and Politics
An Interview with Kevin Phillips
Environment: Trampling on Nepal
by Lori Udall
Economics: A Worldwide Trail of Failures
by Janice Shields
Book Notes: Detroit’s Descent
Names in the News
Cuba has elections. They do not involve competing parties, but there is a choice of candidates. Candidates are easy to nominate and do not have to be party members or party-approved. Their photos and biographies are posted in public places at government expense. Since the candidates need not spend any substantial amount, rich candidates have no advantage over poor, successful candidates are not beholden to persons who financed their races and office-holders are under no necessity to court potential donors to fund a re-election effort.
The Cubans argue - with some plausibility in my opinion - that their system is more democratic than the U.S. system, not less. If you disagree, you should critique the Cuban system, rather than making the bald assertion that political democracy is absent. That seems to me an unthinking acceptance of the U.S. propaganda line which does no justice either to Cuba or to democracy.
Laurent B. Frantz
Palo Alto, CA
"The current government in Quebec does not put any priority in Great Whale," Quebec Premier Jacques Parizeau told reporters in November 1994. "We don’t need Great Whale," he said, adding it would be postponed for "quite a while."
The $9.7 billion Great Whale project, envisioned by former Premier Robert Bourassa, would have flooded 1,312 square miles in northern Quebec in order to generate 3,200 megawatts of electricity, primarily for export to U.S. markets. Hydro Quebec initially planned to complete the project by 1996, but a fall in the growth of demand, partly due to cancellation of electricity contracts by New England states over environmental and cost concerns, had already pushed the target completion date back to 2003.
Environmentalists and Native representatives sharply criticized the project, claiming it was an economic boondoggle and an environmental catastrophe. They argued that the project should be scrapped and replaced with conservation initiatives and smaller-scale projects. Native Cree who live in northern Quebec said the dam would flood their hunting lands and destroy their traditional lifestyles. Following Parizeau’s announcement, a Cree representative told Reuters he was "very happy" that the premier shelved the project, because it would allow the Cree to continue their way of life.
Hydro Quebec, in a statement, said it will "exclude the Great Whale project from the strategic plan on which the corporation is currently conducting public consultations."
Thousands of Caterpillar workers have been on strike since June 1994. The current strike follows a five-month walkout in 1991 to 1992, which ended in a high-profile union capitulation in the face of a company threat to permanently replace strikers.
NLRB Administrative Judge James L. Rose determined that Caterpillar illegally fired a worker for distributing union literature and illegally suspended 23 workers who displayed union slogans at the company’s York, Pennsylvania plant. The judge ordered Caterpillar to "cease and desist from discharging, suspending or otherwise discriminating against employees because they engage in union or concerted activity." He ordered the company to reinstate and pay back wages to the workers.
A Caterpillar statement justified the suspensions as based on "the company’s right to maintain a business-like atmosphere in its facilities." It called the labor charges "a smoke screen to divert attention from the UAW leadership’s refusal to negotiate a contract that is fair to Caterpillar employees, while enabling Caterpillar to maintain its leadership in the global marketplace."
"Judge Rose’s decision spells out very precisely the rights and responsibilities for union members - and for the company - inside the workplace." says UAW Secretary Treasurer Bill Casstevens. "We’re prepared to meet with Caterpillar immediately and begin addressing all of the pending unfair labor practice complaints on that basis."
Grace has obtained various "species" patents in Europe, North America and India that allow the company to control all research and applications of genetically-engineered versions of the patented species.
The December 1, 1994 complaint charges that Grace’s soybean patent fails to meet standard criteria for patentability, since it is neither "novel" nor "non-obvious."
RAFI also cites ethical reasons for revocation of the patent. Valued at $27 billion per year, soybean is a crucial world food crop. Grace’s patent allows the company to dictate the terms for developing genetically-engineered versions of the crop and makes it illegal for farmers to save transgenic soybean seed that they harvest [see Patenting the Planet," Multinational Monitor, June 1994 ]. "A patent granting a single corporation monopoly control over genetic research on one of the world’s most important food crops ... is a threat to world food security, and demonstrates that the patent system is recklessly out-of-control," says Patrick R. Mooney, RAFI’s executive director. "If the soybean patent is allowed to stand, the door will be wide open to yet broader patent claims on additional food and industrial crops."
Grace refused to comment on the filing, but in the past has stated that it will allow free licensing of its patent to all government and academic researchers upon request. RAFI calls this offer "nothing more than a clever public relations gimmick for the purpose of deflecting criticism of their patent and clearing the way for additional broad patents to be issued in the future." RAFI points out that the offer of free licenses is legally unenforceable and could later be revoked.
In addition to the European challenge, Grace’s broad crop patents have been challenged in India and North America. The government of India announced earlier this year that it intends to revoke the company’s species patent on cotton; RAFI and the Canadian Environmental Law Association have challenged the soybean patent in Canada; and shortly after the European filing, the U.S. patent office repealed Grace’s U.S. patent on genetically-engineered cotton.
- Aaron Freeman
Bhopal represents the worst compound of injustice.
In December 1984, the residents of Bhopal, India were gassed in one of the most severe cases of corporate violence ever. Thousands of poor people died in the immediate aftermath of the deadly gas leak from a Union Carbide pesticide factory, and thousands more have since died from disaster-related complications. Estimates of the running death toll range from a low of 3,000 to a high of 16,000. Hundreds of thousands more suffer from blindness, permanent lung damage, gas-related cancers, post-traumatic stress disorder and other ailments.
Ten years later, the Bhopal victims’ anguish continues, not only because of their ongoing physical suffering and contraction of new diseases, but because they have received practically no money to pay for medical care, replace lost earnings or compensate for injury and the loss of loved ones.
Union Carbide and the Indian government share responsibility for the decade-long denial of even money damages to the Bhopal victims. Supposedly to prevent the victims from being exploited by U.S. lawyers who sought to represent them, the Indian government took over legal representation of all Bhopal claimants against Union Carbide. Although the case against Carbide was initially filed in U.S. courts, where the Bhopal plaintiffs could hope to receive the largest award, a U.S. federal judge ruled that the case should properly be heard in Indian courts. Instead of appealing, the Indian government accepted this ruling. In Indian courts, the Indian government won a verdict of more than half the $3.2 billion it sought on behalf of the victims. That amount was slashed on appeal, however, and, before the Indian Supreme Court rendered a decision on the case, the government and Carbide settled for a paltry $470 million.
Carbide paid the settlement, but the Indian government, plagued by inefficiency and corruption, has failed to dispense the small sum of money available. Bhopal residents have received a minimal payment of approximately $7 monthly; these small payments will eventually be deducted from the sums paid to victims.
Meanwhile, Union Carbide, stung by one of the worst public relations debacles in history, has managed to recover rather well. Although Carbide has estimated the cost of the Bhopal disaster to the company at around 50 cents per share, its stock price rose $2 per share the day the company settled with the Indian government. In the wake of the disaster, the company had to reposition itself; it has now divested itself of many of its operations, including recently its facilities in India, and tried to establish itself as an environmental leader in the chemical industry. While acknowledging that Carbide has made some progress in reducing toxic emissions from its plants, activists denounce the company’s efforts to paint itself green, and contend the company’s operations remain particularly dirty and dangerous.
The effort to achieve some decent measure of accountability, to recognize the criminal nature of the tremendous preventable violence unleashed in Bhopal, has now been reduced to an attempt to bring the equivalent of manslaughter charges against retired Carbide Chief Executive Officer Warren Anderson and a handful of other Union Carbide executives. (In its settlement with Union Carbide, the Indian government agreed not to pursue any criminal charges against Carbide employees, but in response to petitions from the victims, the Indian Supreme Court subsequently voided the grant of immunity.)
Not surprisingly, Anderson, who was briefly detained in India in 1984 after the accident but released on bail, has declined to present himself to Indian authorities for trial. When the charges against Anderson were reinstated, Carbide argued that Anderson had nothing to do with the Bhopal accident. "As the chairman of Union Carbide Corp., Anderson had no involvement with the operations of the Indian company," the company said in a statement. "Anderson’s only connection was after the tragedy when he attempted to bring aid and relief to the victims in Bhopal."
But an Indian court disagrees. It has found Anderson an "absconder" for failing to appear in court after being summoned, and ordered and reordered the Indian government to seek his extradition from the United States.
The Indian government has dragged its feet in seeking extradition. Abandoning India’s traditional nationalist orientation, the government is now eagerly seeking foreign investment - and a move so bold as to impose criminal liability for the avoidable deaths of thousands of citizens would send the wrong message to foreign investors.
In case the government did not arrive at this conclusion on its own, Union Carbide explicitly stated it after the reinstatement of charges against Anderson: "To persist in continued harassment of Anderson ... would send a signal to the world that the Indian government is permitting those who favor local political expediency to dominate its policy-making."
And so, despite the valiant efforts of the Bhopal victims themselves to organize and demand justice, little appears forthcoming.
For future Bhopals to be averted, new mechanisms of corporate accountability and control will need to be devised. That is the challenge to citizens around the world posed squarely by Bhopal’s double tragedy.
With the advent of new technologies, even remote and rural communities now have an opportunity to access a great deal of affordable, and often free, information from the U.S. government. Operating on the principle that information and databases created with taxpayer dollars should be available to citizens to the greatest extent possible, the U.S. Government Printing Office, for example, has put the Congressional Record, the Federal Register and all House and Senate bills into the public domain on the internet (the computer-accessed network connecting approximately 20 million people) - for free.
But although citizens are expected to know and obey the law, and tax dollars are used to create and interpret the law in the courts, legal information is perhaps the most inaccessible publicly funded information. A private company is keeping judges’ written decisions, known as case law, out of the public domain in order to continue its control over the computer assisted legal research (CALR) market. This monopoly restricts citizens’ ability to access the case laws that form the basis of the precedent-based U.S. legal system. Although printed copies of judges’ decisions are available in some public and law school libraries that are open to the public, high-priced computer services enable researchers to do legal searches and find specific cases more quickly, easily and efficiently.
West Publishing , an Egan, Minnesota-based publishing company, asserts a copyright over its system of citation, which is used in most of the courts across the country. Citation is an essential function of the U.S. judicial process. It is the means by which lawyers, judges and other interested parties can ensure they are all working from the same page when using legal cases as precedents. It is the page numbers of its version of court decisions, and a few editorial enhancements, over which West claims its copyright. Without these citations, judges’ decisions are far less useful.
"[I]t is a fundamental part of our belief that no one should own the law, either outright or in practical effect," wrote Bob Oakley, the Washington, D.C. representative of the American Association of Law Libraries in a September 1994 letter to U.S. Attorney General Janet Reno. "Regrettably, the assertion of ownership of some parts of the published case law together with the requirements of courts and others to cite to certain privately published versions of the case law, have, in practical effect, given one publisher substantial control over the legal information market."
West’s copyright assertion has been challenged in court, but its validity never resolved. Mead Data Corp., owners of the Lexis CALR system, challenged West on the issue of its copyright citation in 1987, but settled out of court, and the terms of the settlement are sealed. A more recent court case on West’s copyright assertion filed in February 1994 by Matthew Bender Publishing, owned by the Times- Mirror Company, also resulted in an out-of-court settlement.
"There has been a clear pattern of settling with the Fortune 500 companies who can afford to litigate, and squashing the small publishers with no means to afford lengthy courtroom battles with a barrage of legal tactics," says James Love, director of the Taxpayer Assets Project (TAP), which advocates greater access to case law. TAP advocates a public domain citation system, with the courts assigning paragraph numbers for judicial decisions and any for-profit or non-profit entity permitted to offer computer search services that rely on the court’s paragraph numbering.
Alan Sugarman, president of Hyperlaw, a New York-based legal publishing company, intervened in the Mathew Bender case but was left in limbo when the two companies settled. Hyperlaw cannot use the West citation system, and without use of the most widely accepted, and in some cases the only accepted, system of citation, Sugarman’s company is unable to meet a key need of lawyers. Hyperlaw can become a supplemental source of information, but not the sole source. "West has a stranglehold on the CALR market and a stranglehold on innovation," says Sugarman.
West did not return calls from Multinational Monitor, but the company has aggressively defended its citation system monopoly elsewhere. From 1989 through August 1994, West Publishing, its WESTPAC political action committee and persons affiliated with West contributed $738,728 to key political campaigns. Four of the five U.S. members of Congress who wrote letters to Attorney General Janet Reno on behalf of West received a total of $45,482 in contributions from West, WESTPAC or individuals associated with West. Martin Sabo, D-Minnesota, led the list with contributions of $18,470, followed by Representative John Conyers, D-Michigan, $17,262, Rep. Jim Ramstad, R-Minnesota, $5,250, and Senator Dave Durenburger, R-Minnesota, $4,500.
Two public relations firms - the Kamber Group and Cordia Companies - have been hired by the already politically well-connected West to obscure the issue, maintain West’s monopoly on legal citation and keep the law out of the public domain. When contacted, a representative of the Kamber Group, which lobbies on behalf of many labor organizations, said the firm was hired to lobby members of congress that leaned to the "left" and the Cordia Companies would lobby the "right."
West paints a picture of impending doom for the private CALR market if a public domain system of citation is established. Minnesota Governor Arne Carlson told Attorney General Reno in a September 1994 letter, "The effect would be to put scores of good companies out of business ... One of those companies is West Publishing, here in Minnesota." This is not a realistic scenario, evidenced by the fact that most publishers, including West’s largest competitor, Mead, support a "vendor neutral" citation system. West profits would be hurt if it had to compete in an open market and could no longer charge monopolistic prices, but it seems unlikely that it would close down. "The nature of West’s business will change, but West has too much talent, skill and capital to be knocked out of the market," says Hyperlaw’s Alan Sugarman.
Meanwhile, across the United States, citizens fighting to assert their rights using the legal system must overcome a severe financial barrier presented by West’s monopoly. Through its copyright assertion, West has created information haves and have-nots, and in the West world of legal citation, the vast majority of U.S. citizens fall into the have-not category.
- Ned Daly and Mike Ward
IN THEIR BOOK, The Bell Curve: Intelligence and Class Structure in American Life, Richard J. Herrnstein and Charles Murray argue that "as a group, criminals are below average in intelligence."
Actually, the opposite is true.
As a group, those criminals who inflict the most damage on society, are above average in official measures of "intelligence." They are the best and the brightest who run the world’s multinational corporations. They come from the best communities, get the highest scores on standardized tests, go to the best schools, enter the biggest corporations, and get the highest pay.
Herrnstein and Murray got it wrong because they left white-collar and corporate criminals out of their analysis. This is a significant omission, since it is undisputed that white-collar and corporate criminals inflict far more damage on society than all street criminals combined.
White-collar fraud alone costs $200 billion a year, according to W. Steve Albrecht, a professor of accountancy at Brigham Young University and co-author of the book Fraud: Bringing Light to the Dark Side of Business. In contrast, the Federal Bureau of Investigation reports that for 1992, street robbery cost $565 million and burglary cost $3.8 billion.
Albrecht points out that criminal fraud occurred in 60 percent of all savings and loans seized by the federal government and that 30 percent of all business failures are caused by white-collar crime.
And this "intelligent crime" also is the more violent crime. The handful of the world’s corporate criminologists who have studied this issue are in agreement that corporate crime and violence kills far more people than all street crime combined. For example, while the murder rate in the United States is about 24,000 a year, the National Institute of Occupational Safety and Health estimated recently that occupational diseases kill 50,000 Americans a year. In addition, 10,000 people in the United States die on the job every year. These deaths are only occasionally prosecuted as reckless homicides by local prosecutors.
Thousands die every year from asbestos-induced disease. The Dalkon Shield IUD injured thousands of women who used it. Ten years ago, 2,000 to 5,000 persons were killed and 200,000 were injured - 30,000 to 40,000 of them seriously - after a Union Carbide affiliate’s factory in Bhopal, India released a deadly gas over the town.
In the United States, Attorney General Janet Reno has set violent crime as her number one priority. By "violent crime" she means violent street crime. She has rarely, if ever, condemned violent corporate and white-collar crime.
The defense bar agrees with Reno. You will not see the American Bar Association White-Collar Crime Committee, which is heavily dominated by white-collar crime defense lawyers, seek the passage of a resolution condemning violent corporate crime.
Of course, most corporate and white-collar violent crime goes unprosecuted. This happens for a wide range of reasons, including the exercise of corporate power in Washington, which works to decriminalize such violent behavior. The federal auto safety law, for example, carries no criminal sanctions, thanks to the auto lobby. For years, auto safety advocates have sought to add criminal sanctions to the law, and for years, the auto lobby has blocked its passage.
So, in honor of the "intelligence" of our corporate leaders, we present The Ten Worst Corporations of 1994.
Keep your eyes open for the really smart corporate moves of the new year. On January 1, nominations will open for the Ten Worst Corporations of 1995.
The Denny’s policy was known as "blackout," and it was meant to make African-American customers feel uncomfortable and excluded.
Kohn documents how at a Denny’s restaurant in San Jose, California, "young African-American customers stepped out of their cars into the illuminated parking lot only to find themselves in a race to the front doors. ... Denny’s employees rushed to lock up, and the blacks were left to wonder at the baldfaced claim, ‘We’re closed.’ Only after they left were the doors reopened."
"I couldn’t believe it," Robert Norton, a white employee, said. "I said to the duty manager, ‘This is ludicrous. How can you be doing this?’ But I was told this was how the game was played."
Earlier this year, the Justice Department announced that what was happening at the San Jose Denny’s was not an isolated incident. Denny’s agreed to pay $46 million in damages and to launch a nationwide program to avert future discrimination. The Justice Department said that the settlement of two lawsuits, one in San Jose and one in Baltimore, Maryland, against the company contained "the most sweeping preventive measures and the largest monetary damages ever in a public accommodations case."
The lawsuits alleged that Denny’s failed to serve blacks, required blacks to pre-pay, and forced them to pay a cover charge. In one instance, African-American Secret Service officers who accompanied President Clinton were denied service at a Denny’s in Annapolis, Maryland. This led a CBS-TV news anchor to report that "these agents put their lives on the line every day, but they can’t get served at Denny’s."
John P. Relman of the Washington Lawyers’ Committee for Civil Rights calls the settlement historic because "for the first time it puts a price tag on indignities that black Americans endure every day at restaurants and public places all across America."
In the California case, 40 African-Americans alleged discrimination. In one case, Michael Maxwell, a police officer, his wife, Demetrece, and 13 other family members went to a Denny’s Restaurant in San Diego, after watching Mrs. Maxwell’s brother play in his last college football game for San Diego State University.
The Maxwells and eight of their party were seated together and were told they had to pre-pay for their food. The other members of the Maxwell group including Mrs. Maxwell’s father had not been required to pre-pay. When Mrs. Maxwell asked the manager why some of the group had to prepay while others did not, the manager replied that the waitress had made a mistake by not requiring them all to pre- pay. Members of the Maxwell party observed at least six white customers walk to the register and pay after they had consumed their meals.
Kohn, who is writing a book, "We Had a Dream," about desegregation in the United States a generation after the civil rights movement, writes that the real problem at Denny’s "was the theory held by employees that black customers were bad for business."
"The problem of discrimination at Denny’s did not come out of the blue - it had existed for years," Kohn concludes.
Because of the lawsuits, Denny’s has been forced to promise change. In addition to paying the damages, Denny’s agreed to: retain an independent civil rights monitor, educate and train new employees in racial sensitivity, and feature African-Americans and members of other racial minority groups as customers and employees in advertising "to convey to the public that all potential customers, regardless of their race or color, are welcome at Denny’s."
[Contact: Ron Petty, CEO, Denny’s, 203 East Main Street, Spartanburg, S.C. 29319-9722. Telephone (803) 597-8000]
[Contact: Washington Lawyers Committee for Civil Rights and Urban Affairs, 1300 19th Street, N.W., Suite 500, Washington, D.C. 20036. Telephone: (202) 835-0031]
Delaney is the only zero-carcinogen law currently on the books. But a group of major U.S. corporations, led by Dole Foods, is seeking to wipe out Delaney’s no-cancer approach and replace it with a "negligible risk standard."
Dole is a $3.4 billion global fruit and vegetable corporation with headquarters near Ventura, California. The majority of Dole’s pineapple and banana plantations are in Central America.
Dole, which did not return calls seeking comment for this article, has a proven record of contempt for its workers and consumers. Pesticides that were banned in the United States were used by Dole in Central America. One such pesticide, dibromochlorpropoane (DBCP), was banned in the United States in 1977, but sold overseas. A Dole subsidiary, Standard Fruit Co., used it on banana plantations in Costa Rica before and after it was banned in the United States. It was banned in the United States as being a suspected carcinogen. DBCP also causes sterility in men.
Hundreds of workers in Costa Rica who allegedly were sterilized after being exposed to DBCP sued Dole and the manufacturers of the pesticide in state court in Texas. The case was settled in 1992 for $20 million. An additional 15,000 workers have similar claims currently pending in Texas courts, according to their attorney, Dallas-based Charles Seigel.
At Standard Fruit Co.’s pineapple plantation in Honduras, Dole has allegedly used pesticides that were banned or heavily restricted in the United States. In 1992, a Honduran government commission confirmed problems at the pineapple plantation. The commission found workers with skin rashes, eye problems, headaches dizziness and nausea.
So, it is little wonder that Dole has contempt for a U.S. law, the Delaney Clause, that prohibits cancer-causing pesticides in the food chain.
In 1988, the Environmental Protection Agency adopted a policy that allowed pesticides in food if, in the EPA’s opinion, the risks were "negligible." Instead of eliminating all additions of cancer- causing chemicals to processed foods, as required by Delaney, the EPA wanted to use a risk-assessment analysis to determine how much pesticides to allow in the food supply.
But in July 1992, a federal appeals court ruled that the EPA was wrong. The court ruled that the presence of cancer-causing pesticides in processed foods constitutes a violation of the Delaney Clause. As a result of that decision, one of two things will happen in coming months: Congress will weaken or abolish the Delaney law, or the EPA will be forced to proceed with plans to ban about 50 cancer-causing pesticides [see "Delivering on Delaney," Multinational Monitor, September 1994].
Dole wants Congress to cripple or wipe out the law.
So, apparently, does the Clinton Administration. EPA Administrator Carol Browner argues that some pesticides pose little threat to human health, since they are consumed in small amounts, and should therefore be allowed for use in "negligible" quantities.
The "negligible risk" policy adopted by the Clinton administration over-simplifies the hazards associated with pesticides. The model ignores the cumulative risk of multiple pesticides that may be used on a single food, the potential interactive effects of multiple pesticides being used, and the harmful effects on certain high-risk populations, including young children, the elderly and disabled. A July 1993 National Academy of Science study found that the amount of pesticide residues the government currently allows on fruits and vegetables may already pose an excessive risk to children.
Citizen’s Clearinghouse for Hazardous Waste, founded by the activist Lois Gibbs, has launched a campaign to save the Delaney law. Gibbs is urging all citizens to contact their local schools and ask them not to purchase Dole products, ask their local supermarkets not to sell Dole products, and call or write Dole to let them know how you feel.
[Contact: David Murdock, CEO, Dole Foods, 31355 Oak Crest Drive, Westlake Village, CA 91361. Telephone: (818) 879-6600 Fax: (818) 879-6618. Or Toll Free: 800-232-8888]
[For more information on Protect Our Children - Save Delaney Campaign, Contact: Citizens Clearinghouse for Hazardous Waste, P.O. Box 6806, Falls Church, VA 22040. Telephone: (703) 237- 2249]
The Multinational Monitor has been putting out the Ten Worst list since 1988, and GE made the cut in 1988, 1991, 1992 and this year, 1994. Why? Because GE is what corporate criminologists call a recidivist corporation - it keeps getting into trouble with the law.
A report released this year by the Washington, D.C.-based Government Accountability Project found that 20 of the 22 largest defense corporations, including GE, that were lobbying Congress to weaken the Federal False Claims Act, have been involved in fraud, waste and abuse in government contracting.
The False Claims Act is one of the country’s toughest laws against corporate crime. The law gives whistleblowers a monetary incentive for alerting the government to those who defraud the government. Since the passage of the 1986 amendments to the law, the federal government has recovered over $588 million under the Act.
Obviously, GE and the defense contractors - also known as "the fraud lobby" - don’t like the law, because it exposes their wrongdoing. The report found that just since 1990, General Electric has been caught engaging in 16 instances of fraudulent activity, and has twice been convicted of criminal misdeeds.
In June of this year, federal officials began investigating allegations that 7,000 military and commercial jet aircraft engines, including ones that power President Clinton’s plane, may be defective. GE, the manufacturer of the engines, denies the allegations, saying the engines in question have flown for more than 200 million hours without an electrical problem such as the one in question. The Cleveland Plain Dealer first reported the investigation. A whistle-blowing GE employee filed a lawsuit against the company claiming that the engines "unnecessarily endanger the health and well-being of pilots, maintenance service personnel and passengers, including the very real likelihood of loss of life."
GE has also been busy in recent years engaging in union busting in Mexico.
In May 1993, Fernando Castro Hernandez, a worker at GE’s small motor facility in Juarez, Mexico, was demoted after he refused to falsify company safety reports. The GE facility was not unionized, so Castro joined with fellow co-workers and began to organize. In November 1993, Castro and about 120 other pro-union workers were fired. GE told Castro that he was fired for distributing union fliers and for telling a U.S. reporter that GE used chemicals in its Mexican plant that had been banned in the United States.
When President Clinton was touting the North American Free Trade Agreement (NAFTA) to the U.S. public last year, he promised that labor abuses such as those inflicted on Castro and his co-workers would be stopped by authority of a NAFTA side agreement. President Clinton was wrong. At a hearing about worker rights abuses by GE and Honeywell before the National Administrative Office (NAO), the agency established to enforce the side agreement, GE denied violating Mexican labor laws; the NAO said it did not have the authority to act. This is the only such hearing the NAO has held.
[Contact: John F. Welch, Jr., Chair and CEO, GE, 3135 Easton Turnpike, Fairfield, CT 06431. Telephone (203) 373-2211]
[Contact: Government Accountability Project, 810 1st Street, NE, Suite 630, Washington, D.C. 20002. Telephone (202) 408-0034]
[Contact: United Electrical, Radio and Machine Workers of America, 2400 Oliver Building, 535 Smithfield Street, Pittsburgh, PA 15222. Telephone: (412) 471-8919]
Clarence Ditlow, the director of the Center for Auto Safety, and a major thorn in GM’s side on safety issues, earlier this year called for a criminal homicide prosecution against the giant automaker for manufacturing and marketing pickup trucks that it knows "are rolling firebombs that would incinerate 20 times as many people in crashes as the infamous Ford Pinto." Ditlow estimates that more than 600 persons have been burned to death in GM pickup fire crashes and thousands more have been injured.
In the first and last homicide prosecution of a major auto company, Ford Motor Company was indicted by an Indiana grand jury in September 1978. The indictment charged the company with reckless homicide in connection with the deaths of three teenaged girls who were burned to death after their Ford Pinto was rear-ended. A jury found Ford not guilty of those charges.
GM spokesperson Ed Lechtzin says he thinks that Ditlow’s call for a homicide prosecution was "absurd." When asked why he thought it was absurd, Lechtzin said, "When you think something is absurd, you don’t have to explain it."
Ditlow made his statement after Department of Transportation Secretary Federico Peña announced in October that an initial decision had been made that a safety defect exists in the GM trucks with fuel tanks mounted outside the frame rails. "Of critical importance in this matter is the evidence that GM was aware, possibly as early as the mid-1970s, but certainly by the 1980s, that this design made these trucks more vulnerable and that fatalities from side-impact fires were occurring," Peña said at the time. "However, GM chose not to alter the design for 15 years."
Ditlow said that Secretary Peña’s decision "sets the stage for state prosecutors to bring homicide prosecutions." Peña said, "The record clearly shows that there is an increased risk associated with GM C/K series pickups and leads me to conclude at this point that this risk is unreasonable. This case involves not only serious injuries, but a significant number of fatalities, in crashes that were otherwise survivable."
There were 9 million GM C/K pickups manufactured with fuel tanks mounted outside the frame rails, dating back to the 1973 model year. In one of the most extensive investigations in the agency’s history, the National Highway Traffic Safety Administration (NHTSA) reviewed over 100,000 pages of documents, conducted crash tests and completed statistical and other analyses related to the alleged defect.
Ditlow said that Peña "stood up for the American consumer to confront a $140 billion corporation that refuses to spend $100 per truck to fix the worst crash fire defect in history."
"If General Motors continues to stonewall a recall, it will face billions of dollars in punitive damage awards in product liability lawsuits as these trucks continue to explode on the highways of America," Ditlow said. "We call on General Motors’ board of directors to admit that it made a horrible mistake 20 years ago and to reject the bankrupt strategy of its lawyers since then to carry out a scorched- earth defense of the pickups."
Just as this issue was going to press, Secretary Peña buckled under enormous auto industry pressure and announced that he was closing down the government’s investigation and cancelling three days of public hearings. Those public hearings would have put burn victims and families of burn victims into the national spotlight, thus guaranteeing harsh negative publicity for GM.
As part of a settlement agreement, GM said it would pay $51 million to "support safety programs." But the settlement did not address the safety of the trucks in question. Ditlow calls the settlement a "blood money" agreement.
"If Secretary Peña won’t stand up to GM, we will," Ditlow says.
"We cannot let five million Americans ride at risk of fiery death. The secret deal Secretary Peña cut with GM behind closed doors will let over 100 more people burn to death who could have been saved by a recall."
Early last year, a Georgia jury hit GM with a $105 million punitive damage verdict in one such products liability case (Moseley v. General Motors). That award was overturned on technical grounds earlier this year. The case is scheduled to be retried next year in Atlanta.
Joe McCray, a San Francisco-based trial lawyer who has handled 19 GM pickup truck injury and death cases, estimates that about 300 such cases have been brought against GM. Only a handful have gone to trial. McCray claims that as far back as 1978, GM’s own studies showed that putting the gas tanks outside the framerails increased the risk of the tanks crushing on impact, spilling gasoline and resulting in fire.
"Ford didn’t make a particularly good truck, but at the same time they did secure the fuel tank between the frame rails," McCray says. "You could whack a Ford at 60 miles per hour, and there would be no fuel spillage. You could whack a GM pickup truck at 60 miles per hour, and fuel would be all over the place and there would be a very large fire."
According to auto safety critic Byron Bloch, GM developed safety bladder type liners for fuel tanks made from tough-skin, flexible, puncture-resistant plastics to fit inside the sheet-metal fuel tanks as a snug liner. But GM refused to install such liners on most of its cars and trucks.
Bloch says that GM internal memos from 1978 and 1979 describe the liner project. A 1979 GM memo asserts that "the only means of assuring fuel tank crash integrity is a fuel tank liner" and "a fuel tank liner would be required for significant improvement in crash performance."
GM put the bladder liner in its Chevrolet Corvettes beginning in 1975 for added protection, Bloch says, and he urged GM to put the liners in the GM pickup trucks. Bloch estimates that the bladder fix for the 4.5 million GM C/K trucks currently on the road would cost about $200 per tank, or $900 million overall.
GM’s troubles with law enforcement officials around the country continued to mount this year. In April, GM was fined a record $1.945 million for safety violations at its Oklahoma City assembly plant following the 1991 death of a worker. GM had contested the case brought by the Occupational Safety and Health Administration (OSHA).
OSHA began investigating GM on April 4, 1991, the day GM worker Don Smith died of fatal head injuries when he was struck by a conveyor lift that began moving while he was repairing it. An OSHA administrative law judge upheld 43 of 57 penalties initially charged by OSHA, resulting in the biggest fine OSHA has won in court to date.
And last year, the California Department of Motor Vehicles charged GM and 34 northern California dealerships with fraudulently reselling 51 vehicles with serious mechanical problems without disclosing their history of defects to the purchasers. GM settled the "lemon-laundering" charges in April 1994 by agreeing to pay the California DMV $330,000.
[Contact: John F. Smith, Jr., President and CEO, GM, 3044 West Grand Boulevard, Detroit, MI 48202-3091. Telephone (313) 556-2044]
[Contact: Center for Auto Safety, 2001 S Street, N.W., Suite 410, Washington, D.C. 20009- 1160. Telephone: (202) 328-7700]
That was the staid New York Times describing the introduction onto the market of recombinant bovine growth hormone (rBGH), the first important product of genetic engineering to be used in food production. When regularly injected into cows, the hormone forces the animals to produce up to 25 percent more milk.
Monsanto, the company that brought you Agent Orange, has invested over $500 million in rBGH, and it made sure earlier this year that the Food and Drug Administration (FDA) approved it over forceful objections from the scientific community.
Monsanto and the FDA want you to think that rBGH is completely safe. The company claims in promotional material that "Milk is carefully tested throughout its passage from the farm to the store to guarantee that it is fresh, healthy and safe. ... [A] comprehensive government monitoring system assures milk safety."
Don’t believe the hype.
Dr. Samuel Epstein, chairman of the Chicago-based Cancer Prevention Coalition, believes that the FDA and Monsanto ignored evidence linking milk from treated cows with increased risk of breast cancer.
The General Accounting Office has warned of the potential hazards to human health by consuming products derived from rBGH-treated cows. The powerful antibiotics and other drugs used to fight increased disease in rBGH-injected cows may lead to harmful drug residues in the milk supply and dangerous resistance to antibiotics in bacteria that can infect the human population.
In addition, the United States has too much milk already. The overproduction of milk caused by Monsanto’s rBGH could force up to 30 percent of U.S. family dairy farmers out of business within three years, according to the Washington, D.C.-based Pure Food Campaign.
And what about the cows? Recombinant BGH is like "crack" for cows. It revs up their systems and forces them to produce a lot more milk, but it also makes them sick. Even the FDA admits that cows injected with rBGH could suffer from increased udder infections (mastitis), severe reproductive problems, digestive disorders, foot and leg ailments, and persistent sores and lacerations.
Because of these concerns, more than 90 percent of U.S. citizens say they want hormone-treated milk labeled. But the FDA has written restrictive rules to prevent farmers and retailers from informing consumers that a dairy product is free of rBGH. The FDA rules governing this issue were written by Michael Taylor, who, before joining the FDA, worked for a law firm in Washington, D.C. representing Monsanto.
The Pure Food Campaign has called for a boycott of all Monsanto products. Ronnie Cummins, director of the campaign, says that Monsanto and other giant multinational corporations realize that consumers don’t want biotech foods. "They have to force consumers to accept these products," Cummins says. "And the only way to force consumers to accept genetically engineered food is to refuse to label it."
"rBGH poses serious health hazards for humans, it is bad for cows, it is going to put up to 30 percent of family dairy farmers out of business and it is a disaster for the environment," Cummins says. "It is also the gateway product for several hundred other genetically engineered foods that are waiting in the wings for FDA approval."
The Pure Food Campaign has signed up thousands of people in the United States to work to fight biotech foods. The Campaign urges consumers to demand products that are rBGH-free from their supermarkets. Consumer pressure on local retailers has been intense in recent months. Supermarkets are taking out ads in local newspapers informing consumers that they carry milk from dairies that don’t use rBGH.
In response, Monsanto sent letters to 2,000 retailers in Illinois and Wisconsin reminding them to obey the FDA labeling rules and warning some that their advertising violates those guidelines. And the company sued an Iowa dairy cooperative and a Texas dairy products firm, alleging that their ads violated federal law.
All this was too much for the National Farmers Union, which called for a national boycott of Monsanto products, including sweeteners NutraSweet and Equal and herbicides Roundup, Lasso, and Lariat.
[Contact: Richard J. Mahoney, Chair and CEO, Monsanto, 800 North Lindbergh Boulevard, St. Louis, MO 63167. Telephone: (314) 694-1000]
[The Pure Food Campaign advises consumers to check with major food producers such as Dannon, Kraft, McDonald’s and Pizza Hut, to see if they are using Monsanto’s biotechnology in their dairy products. If they are, or if they refuse to answer your question, boycott them too. To get involved in the campaign, contact: The Pure Food Campaign, 1130 17th Street, N.W., Suite 300, Washington, D.C. 20036. Telephone: (800) 253-0681 or (202) 775-1132]
But Nike has an ongoing, potentially devastating image problem that it must constantly work to suppress. As the Economist magazine put it succinctly in July 1991, "a pair of Nike sports shoes that sells for $150 in the United States is made by Indonesian women paid the equivalent of 58 cents a day."
Nike itself makes very few shoes. The company buys its shoes mostly from Asian contractors. According to a September 1994 report by Tilburg, Netherlands-based IRENE (International Restructuring Education Network Europe), 99 percent of the 90 million shoes Nike sells every year are produced in Asia, by a contractor workforce of over 75,000.
In the early 1990s, under critical scrutiny by a handful of investigative reporters, Nike introduced a Code of Conduct. In it, Nike says its business is based on "trust, teamwork, honesty and mutual respect - we expect all of our business partners to operate on the same principle."
Nike also argues that the jobs Nike supports in the Asia-Pacific region are among the best paying and most desirable jobs in those economies. "The income of an Indonesian entry-level factory worker is five times that of a farmer," a Nike position paper claims. "In the Indonesian labor market, numbering 78 million people and suffering from 40 percent unemployment, having a job at all is considered a benefit." But according to labor activists who have investigated the company’s practices in Asia, Nike has pursued a ruthless policy of cutting costs by finding ever-cheaper production sites.
According to IRENE, after originally making shoes in Europe, North America and Japan, in the early 1980s, Nike shifted most of its production to South Korea and Taiwan , where wages of $1 an hour were as little as one- tenth of those in the United States. "Then about five years ago, as wages and union organizing in Korea and Taiwan both took off, Nike shifted almost half of its production to Indonesia , China and Thailand , often leaving widespread unemployment in its wake," according to Marikje Smit, author of a report on Nike published by the Amsterdam-based Centre for Research on Multinational Corporations.
Sadisah, a Nike production worker, was fired in late 1992 for helping organize her fellow workers in West Java, Indonesia. Sadisah worked for a Korean contractor, PT Sun Hwa Dunia. "Our factory did not pay minimum wages, nor did it meet other regulations, such as a ban on wage deductions for meals, and two-day menstruation leave for women," Sadisah told a conference in Paris earlier this year. "The company ignored workers’ rights, and only emphasized our responsibilities. Working conditions were also very demeaning. For instance, for toilet breaks, we had to wear a sign board saying "I’m going to the toilet."
In October 1991, Sadisah was making the equivalent of 80 cents a day. She and her colleagues drew up several demands to put to the company. These include demands for minimum wages and for women’s entitlement to menstrual leave. A peaceful demonstration was organized and the company eventually accepted most of the conditions. But Sadisah and some of her colleagues were suspended for leading the protests. Despite court rulings in her favor, the company has refused to re-employ her.
Research by the Jakarta office of the AFL-CIO and other public interest groups found that Sadisah’s employer was not the only Nike contractor which failed to meet Nike’s code of conduct. The research found that four of the six factories studied did not pay the daily minimum wage, even though this wage only met two-thirds of workers’ "basic physical needs," as defined by the Indonesian government.
"When we started the research we, perhaps naively, thought that Nike would treat its workers better than local firms," says the AFL-CIO’s Jeff Ballinger. "In fact, the arrival of Nike and other shoe industry transnational corporations made matters worse, by turning the minimum wage into the maximum available." Ballinger says that he found that at least three of the Nike contractors were using child labor, with one 14-year-old girl sewing shoes for 50 hours a week. Compulsory overtime, which is against Indonesian law, was common, as were other violations concerning working hours and holidays, maternity leave and health and safety.
Nike claims that all of its contractors must sign its code, which it monitors internally, and that no code violations have arisen. But labor activists want independent monitors to check to see whether the Nike’s code is being met.
In 1994, Nike spent a reported $250 million on advertising. Ballinger estimates that just 1 percent of that budget would lift 10,000 Indonesian workers above the poverty line. Labor groups have launched a campaign with the slogan "Wearing Nike Shoes Oppresses Indonesian Women" to bring Nike’s action into line with its code.
We suggest boycotting Nike shoes.
[Contact: Philip H. Knight, Chair and CEO, Nike, One Bowerman Drive, Beaverton, OR 97005. Telephone (503) 671-6453]
[For more information on Nike, contact: Jeff Ballinger, Press for Change, P.O. Box 230, Bayonne, N.J. 07002. Telephone: (201) 436-7177]
Leonard ended up in Madras this year, searching for the Pepsi bottles. She followed leads for weeks. One day, she came over a hill, and saw "an absolute mountain of used plastic soda bottles."
"I couldn’t figure out what was going on, because they were not all Pepsi bottles," Leonard says. As it turns out, the bottles were all from California’s recycling program. Every one had a label that said "California Redemption Value." "Pepsi arranges for the shipment of the bottles and sends them to an affiliated company in India," Leonard says.
As Leonard revealed in a Multinational Monitor article earlier this year [see Dumping Pepsi’s Plastic," September 1994 ], Pepsi is involved in both producing and disposing of plastic waste in India. Under Pepsi’s two-part scheme, plastic for single-use disposal bottles are manufactured in India and exported to the United States and Europe, while the toxic by-products of the plastic production process stay in India. Used plastic bottles are then returned from these countries to India.
Pepsi officials in the United States acknowledge that the waste is exported to India, but claim it is all recycled. The company in India that receives the waste bottles, Futura Industries , admits that much of the waste is not recycled. But it will not say where the remaining, "nonrecyclable" wastes are disposed.
And while Pepsi and Futura maintain that the plastic waste imports are legal, Leonard points out that the shipments may violate both Indian law and the terms of an international treaty. Last April, the Indian Commerce Minister banned the import of plastic wastes into the country. And the Basel Convention on Wastes, which regulates the waste trade and prohibits hazardous waste exports, does cover "waste collected from households."
Pepsi’s dumping of plastic waste in India has fueled the anti-Pepsi mood in the country. Protesting activists in Madras have taken to defacing Pepsi billboards. In New Delhi, thousands of activists have vowed to disrupt the sale of Pepsi in the city. Many want Pepsi to just leave India altogether. The campaign is part of a larger "Swadeshi" movement to boycott foreign goods in the country.
Citizen activists in the United States have also called for a boycott of Pepsi because it does business with Burma ’s repressive junta. Pepsi’s Chief Executive Officer Wayne Calloway defends his company’s decision to stay in Burma, saying "I don’t think corporate CEOs should make foreign policy decisions."
Other corporations, including Liz Claiborne , Levi Strauss & Co . and Amoco , under pressure from human rights activists, have decided not to do business in Burma any longer.
But Calloway has decided to keep Pepsi in Burma, and he has strongly criticized human rights activists. After hearing about the Pepsi boycott from one such activist, Calloway wrote back, accusing the activist of "dealing in coercion and strong-arm tactics." "It’s no different than what years ago was practiced by Joe McCarthy and the like," Calloway wrote earlier this year. "In those days, ‘establishment organizations’ felt fully justified in using intimidation on progressives and liberals ... feeling their noble purpose justified anything. They were wrong then, just as you are wrong now, in my opinion. Like a blacklist, a boycott is just another form of intimidation, and those despised tactics of the past are no different than what you are doing yourself. That we are a big, pretty successful company doesn’t change the principle, at all."
This is truly twisted reasoning. Pepsi is doing business in a country dominated by an ugly, repressive regime. It is Pepsi that is engaged in the wrongful practice, not consumers who boycott their high-sugar product.
Boycott Pepsi. And let Calloway know about it.
[Contact: Wayne Calloway, Chairman and CEO, PepsiCo, 700 Anderson Hill Road, Purchase, NY 10577. (914) 253-3700]
[Contact: Greenpeace, 1436 U Street, NW, Washington, D.C. 20009. Telephone (202) 462- 1177]
Every year, three million people around the world die from tobacco-related diseases. In the United States, smoking is the leading preventable cause of death, killing over 400,000 people each year. In spite of the known dangers of tobacco use, the tobacco industry continues to spend billions of dollars each year promoting its deadly products around the world.
Since 90 percent of smokers start before the age of 21 - 60 percent before the age of 14 - much of the tobacco industry’s marketing and promotion is geared toward children and youth. Philip Morris’s Marlboro Cowboy campaign is the classic example of youth marketing, playing on themes of risk-taking and independence. Because of the campaign, Marlboro is the number-one children’s cigarette in the United States, the number-one selling cigarette around the world, and the number-one consumer product in the world.
Tobacco advertising and promotion by Philip Morris and other companies is reversing public health progress in many countries, and expanding the tobacco epidemic, especially in parts of the world where women have traditionally not smoked.
A recent study published in the Journal of the American Medical Association showed that smoking initiation rates among U.S. girls aged 11 to 17 rose rapidly from 1967 to 1973, after Philip Morris introduced Virginia Slims.
The U.S. General Accounting Office reported that in the year after Korea was forced to lift import restrictions on cigarettes made by Philip Morris and other U.S.-based multinationals, the smoking rate among teenage girls rose by more than 300 percent. Similar trends are evident in other countries as well. "Until the arrival of the transnational tobacco companies and the beginning of aggressive advertising, the prevalence of smoking was decreasing," says Dr. Jiri Kozak, an adviser to the Czech Ministry of Health.
Philip Morris and other tobacco companies consistently deny that they target youth with their slick advertising and promotion campaigns, claiming instead that they are only seeking to convince smokers of competing brands to switch. Youth smoking, they claim, is not in the tobacco industry’s best interests.
When the public gets outraged and acts to try to curb the tobacco industry’s marketing excesses, Philip Morris brings its corporate hammer down hard on the public policy. Philip Morris has openly defied tobacco advertising bans in Russia and Hungary . "When you’re moving, you get the feeling the whole country is covered with Marlboro signs," says an advertising representative in Hungary.
The City of New York is currently debating whether to ban smoking in public places. In response, Philip Morris is threatening to move its headquarters out of the city if the ban is passed. And according to a report in the New York Times, the company is pressuring major arts institutions in New York, institutions that have benefited from the company’s largesse in the past, to lobby city officials against the smoking ban.
Philip Morris has set up front groups around the United States to execute its dirty work against public health initiatives. The company recently provided most of the start-up money for the National Smokers Alliance. The organization, the brainchild of the company and its public relations firm, Burson-Marsteller , is evoking images of a powerful "Big Brother" government to sign up members from the extensive mailing list Philip Morris has been compiling through its promotional activities.
In California, Philip Morris bankrolled a campaign to put on the November ballot an initiative that would have crippled tough local anti-smoking ordinances in favor of a milder statewide rule. The Secretary of State in California found that the company engaged in a "systematic scheme of deception" to get enough signatures to get the initiative on the ballot. The company then spent more than $20 million in an unsuccessful effort to get the measure passed.
Earlier this year, INFACT, the citizen action group in Boston, called for an international consumer boycott of Philip Morris. Since Philip Morris derives 56 percent of its overall revenues from food and beer, consumers around the world can boycott these products to pressure the company to stop inducing young children to smoke tobacco. "It’s time for the public to take action and hold these companies directly accountable for their life-threatening activities," said INFACT’s executive director, Elaine Lamy.
Key brand names on the boycott list are: Kraft, Oscar Mayer, Maxwell House, Post, Jell-O, Kool-Aid, Marlboro, Kraft Food Services, General Foods, Miller, and Jacobs Suchard.
[Contact: Michael A. Miles, Chair and CEO, Philip Morris Companies, 120 Park Avenue, New York, NY 10017. Telephone (212) 880-5000]
[For more information on the boycott, contact: INFACT, 256 Hanover Street, Boston, MA 02113. Telephone: (617) 742-4583. FAX: (617) 367-0191]
Unocal, in conjunction with Texaco , is planning to build a natural gas pipeline through some of Burma’s most pristine tropical forests to Thailand .
According to Rainforest Action Network, the proposed pipeline would have profound effects on one of the last remaining forest wilderness areas left in Burma. The junta is preparing the area for the pipeline, with forced labor and ethnic cleansing of the region’s indigenous peoples - the Mons.
Mon defiance of Burma’s State Law and Order Restoration Council (SLORC) - the junta in power - has led to constant campaigns of ethnic cleansing directed at them. Villagers suspected of sympathizing with Mon resistance fighters are tortured, raped, and massacred by SLORC troops.
The Mons, once Southeast Asia’s great Buddhist civilization, are now an endangered, hunted people. Human rights groups say that the SLORC is making Mon villages disappear, and eradicating the inhabitants so there will be no risk of sabotage to the pipeline. Mons are being taken as slaves to work on infrastructure projects, building roads, extending the railway line and building new army bases for the SLORC battalions.
Nobel Peace Prize winner Aung San Suu Kyi has called on all nations to boycott Burma.
Rainforest Action Network is calling on Unocal to disinvest from the country.
While Unocal is apparently getting away with its partnership with the murderous regime in Burma, it was forced to admit to criminal pollution in California. Unocal was found guilty earlier this year of three criminal pollution charges and was fined $1.5 million for leaking diluent, a petroleum thinner, into the ocean and groundwater at its Guadalupe oil field.
Unocal was found guilty of discharging up to 8.5 million gallons of chemicals over a 40-year period. It ranks as California’s largest oil spill and the fourth largest spill in U.S. history.
Unocal took over the Guadalupe oil field in 1953. California investigators charged that illegal discharges have occurred at the field since 1978, and alleged that the company attempted to cover up the leaks. In 1990, the company admitted that petroleum thinner that was seeping from the sand at Guadalupe Beach came from the oil field. At various times, diluent has covered beaches in central California with an oil sheen.
California authorities agreed to drop 33 misdemeanor charges, including six charges against employees of Unocal, when the company accepted full responsibility for the criminal conduct. The company still faces up to $170 million in civil fines.
Residents of the California coast have complained for some time that the diluent was contaminating beaches and harming sea lions, seals and other marine animals. In 1990, the company built a retaining wall to prevent the oil from hitting the beach. But in January 1994, the diluent was still surfacing on the beach beyond the restraining wall.
State officials have not been able to determine how much diluent has flowed into the ocean, but recovery wells on the beach have recovered more than 650,000 gallons since 1990. Unocal has said that most of the leaked petroleum has seeped into the ground below the oil field, and may have contaminated the ground water. Experts hired by the company have estimated that 4.6 million to 8.5 million gallons of diluent have leaked into the ground. State officials estimated that there have been 190 leaks of diluent at the oil field that went unreported.
Unocal is also pushing ahead with plans to begin operating a sour-gas facility in Canada near Little Buffalo, Alberta. The facility, which would be used to remove excess sulfur from natural gas, is adjacent to and upwind from a village of Lubicon Cree. The facility will emit hazardous pollutants into the air.
For years, the Lubicon lived a self-sufficient life on their land, hunting, gathering and trapping. In 1979, the government in Alberta allowed oil companies to explore on its territory. According to a report by the Rainforest Action Network, in four years, the companies drilled 400 oil wells within 15 miles of Little Buffalo. The drilling activity eventually destroyed the hunting and trapping areas and the Lubicon were forced onto welfare. The Lubicon believe that the oil industry, and Unocal’s facility, represent "genocide, pure and simple." They want the facility decommissioned.
Unocal did not return calls from Multinational Monitor.
[Contact: Rainforest Action Network, 450 Sansome Street, Suite 700, San Francisco, CA 94111. Telephone: (415) 398-4404]
[If you have a Union 76 or Unocal credit card, cut it up and send with a letter of protest about the company’s Burma and other operations to: Roger Beach, CEO, Unocal Corporation, P.O. Box 7600, Los Angeles, CA 90051. Fax: (213) 977-7040]
According to consumer advocates, the problem with Halcion is that long-term use induces memory loss, depression, anxiety and violent behavior in some patients. Because of these health concerns, Britain permanently banned the drug. And two years ago, Public Citizen called on the Food and Drug Administration (FDA) to ban the drug as well.
But in 1992, the FDA concluded that Halcion was safe, but recommended stronger warnings about potential side effects.
According to an FDA report obtained earlier this year by Public Citizen, Upjohn "engaged in an ongoing pattern of misconduct" to ensure that Halcion would remain on the market.
The FDA report is based on information obtained during an FDA inspection of Upjohn from December 1991 through March 1992, which was abruptly halted before federal officials completed their investigation. FDA closed down its investigation even though the agency found that in a Halcion study at a prison in Jackson, Michigan, there were serious adverse reactions. Thirty percent of those reactions were not reported to the FDA in Upjohn’s new drug application. "Responsible management was aware of serious side-effects," the FDA found.
Upjohn was seeking approval of Halcion at the one milligram level "even though information shows that there was an awareness that the dose was too high and caused serious side-effects in significant numbers," an FDA memo dated April 4, 1994 found.
In addition, the FDA memo said that Upjohn took no corrective action after reports from Belgium and the Netherlands showed numerous adverse reactions at the one milligram level.
The FDA memo charged that it had uncovered Upjohn documents indicating that the company had chosen to disregard the drug’s hazards in order to increase sales.
FDA investigators found that data on side effects of Halcion were misrepresented to the Japanese and French governments, even though management was informed of the inaccuracies.
Upjohn formed a "product support committee" to counter negative publicity about the drug and to silence critics.
The FDA memo said that the committee attempted to discredit reports by Dr. Ian Oswald, a British doctor; sought to halt publication of a critical article in the New England Journal of Medicine; and provided misleading data to a Boston study group which subsequently sent a flawed letter to Lancet, the British medical journal.
According to internal FDA documents, the FDA shut down its investigation of Upjohn just before investigators were to pick up crucial documents from the company.
Public Citizen’s Dr. Sidney Wolfe has called for a criminal prosecution of Upjohn. "For the past two decades, Upjohn has systematically misrepresented Halcion’s serious behavioral and psychological adverse effects to the FDA, expert [review] panels ... and to the public," Wolfe says.
Upjohn categorically denies Wolfe’s allegations and says that the company "puts nothing ahead of patients’ health."
But Wolfe says that new evidence revealed during a recent trial in the United Kingdom, Upjohn Company v. Professor Ian Oswald and the BBC, "gives further substance to our fears that Upjohn engaged in a pattern of withholding information and misleading the agency concerning Halcion."
Wolfe says that four examples from that case, "any one of which could be grounds for criminal prosecution, are taken from three different studies in which Upjohn either failed to submit data to the FDA or altered data that was submitted."
"It is time for the FDA to criminally prosecute this firm and remove this dangerous drug from the market in the United States, as we petitioned the FDA to do in July 1992 and as has been done in other countries such as the United Kingdom," Wolfe says.
Wolfe adds that the FDA should explain to the U.S. public "how a drug company can engage in an extensive pattern of withholding records and deceiving the FDA regarding a high-selling drug and yet avoid criminal sanctions."
Upjohn was also accused of bribing retailers this year. The company, accused of paying pharmacists to push the company’s diabetes medication, agreed to abandon the payment practice and pay seven states a total of $675,000 to settle the case.
[Contact: Theodore Cooper, Chair and CEO, Upjohn, 7000 Portage Road, Kalamazoo, MI 49001. Telephone (616) 323-4000]
[Contact: Public Citizen Health Research Group, 2000 P Street, N.W., 7th Floor, Washington, D.C. 20036. Telephone: (202) 833-3000] n
Interview: Parasites and Politics
An interview with Kevin Phillips
Kevin Phillips is author of Arrogant Capital: Washington, Wall Street and the Frustration of American Politics and the editor-publisher of the America Political Report. He is a contributing columnist for the Los Angeles Times, a member of the political strategists’ panel of the Wall Street Journal, a regular commentator for National Public Radio and served as a commentator for CBS television at the 1984, 1988 and 1992 Republican and Democrat presidential conventions.
Multinational Monitor: Why were the Republicans able to pull off such a stunning triumph in the recent elections?
Kevin Phillips: Mostly it was a repudiation of Clinton and the Democrats. It looks like the type of pattern we’ve seen four times previously since World War II: the mid-term landslide which usually involves a strong reaction against a President who has very low ratings or has had scandals, or is in the middle of a recession or war. The four previous examples are 1946, 1958, 1966 and 1974. In those elections you had a gain for the party out of power in the House races of between 47 and 56. The Senate change varied from 3 to 13 seats.
The pattern this year is quite similar, and the Republicans will make a big mistake if they over- interpret this as a mandate for themselves as opposed to a vote of disgust with Clinton, Washington and the Democrats. The polls show that people were mostly voting against Clinton and the Democrats, not for the Republicans.
What makes this so interesting, of course, is that you do have one component of this election that can be described as a revolution, and that’s in the House. But in the larger sense, within Washington and the national political system, this isn’t a revolution. It isn’t a realignment. It’s a mid-term landslide pattern that’s been seen before.
MM: So you do not think that it was a vote for the "Contract with America" and that Republican agenda?
Phillips: No, not specifically a vote for the contract or agenda. It was a vote that was cast with the idea that the Republicans would advance their own programs, which would not include big government, preference to Washington lobbyists, or something like that.
In other words, there were certain things people were very clear that they didn’t like. They didn’t like the President, first of all. They didn’t like the big government solutions, and they didn’t like making promises to change things in Washington and then not doing it. I think it’s fair to say that they didn’t like all those things.
That doesn’t add up to much of a mandate for the Republicans, because that’s not the way in which they were likely to err. The average person really didn’t know what was in the Republican contract.
MM: Do you think the Democrats could have done better in the election?
Phillips: You can always say that the Democrats could have done better. The Democrats could have understood earlier that they had a leader who was somebody who wasn’t making it with the American people. They could have understood that they came up with a too large, intricate and bureaucratic health program, and that was a mistake, and that it was going to be a tarbaby. So the Democrats made a lot of misjudgments.
I also think that you can’t prosper if you’re the Democratic Party with what could be called Goldman-Sachs economics. You’ve got to have "average person" economics. You start resting your oars on the Robert Rubins and Tony Coelhos, you’ve got a big problem.
MM: How then do you respond to the widely held view that the message to the Democrats is that they need to move to the center?
Phillips: The center is mush. The center is interest groups. That’s not where they need to go. They need to develop a dynamic politics based on perceived Republican failures.
I would agree that they have to get rid of the Democratic fascination with cultural fringe politics. They’ve just got to figure the average person doesn’t want that, doesn’t like it, and it’s going to cost them a lot of votes.
But in terms of their role in supporting the economics of the average man and in opposing the excesses of corporate financial leaks, that’s what keeps the Democrats in business starting with Jefferson, and certainly down to Harry Truman.
You don’t restore that dynamic in the center. The center is where you go in and get the envelopes from the lobbyists with checks in them.
MM: Do you think the vote onNAFTA had any effect on the election?
Phillips: I think it gave Clinton an artificial surge of confidence in November-December- January of 1993, early 1994, and it dovetailed at the time with a seeming pickup in the economy. That was probably part of what kept him in high gear on health reform too long. If he backed down to a more moderate position during that period, he would have avoided what was a very dangerous and tricky debate for himself.
The other thing that was a problem for him with NAFTA is that it coincided with this whole emergence of Goldman-Sachsonomics, which is what I call it now. It seems to sum a lot of things up. That’s being in love with the bond market, and not understanding that the happiest bond market comes when the average American is in economic trouble, and pulling punches on all kinds of economic issues including corporations dumping 8,000 or 11,000 people so that they can get their stock values up. It turned out that in a couple of those cases of mass layoffs, like Xerox , the CEO of the company that was doing the dumping was a Clinton fundraiser.
You had striker replacement and a whole lot of other issues where Clinton created the impression, I think, with a lot of people within the labor movement and among blue-collar Americans, that this was a Democratic administration that wasn’t on their side. This was a Democratic administration that liked to hobnob with Wall Street fatcats, worried about the bond market and got its contributions from lobbyists who weren’t lobbyists for unions. The whole effect of that, together with Clinton’s lack of personal credibility, was probably a fairly low labor and blue-collar turnout in historic terms and a loss of commitment to the administration.
MM: What do you mean when you talk about an electoral revolution?
Phillips: Thomas Jefferson had a notion, and so did some of his contemporaries, that we had to have a kind of revolution of a non-bloodshed nature, roughly once a generation. He called the election of 1800 the Revolution of 1800; although it was just a presidential election, it had a lot of meaning. And Jackson sort of thought of 1828 in the same way.
I’ve always believed that the genius of American politics was to have a great upheaval election that changed the shape of national politics once a generation. We have had them, and they usually involved a sort of populist progressive thrust, in 1800, 1828, 1860, 1896 and 1932, although that populist progressive thrust lost in 1896 because it overreached.
Then we had another one in 1968 that put the Republicans in charge for 20 out of 24 years, but was never able to go below the presidential level, notwithstanding the six years of a Republican Senate. The permanent Washington essentially muted or even blocked the upheaval from the grassroots.
Then Clinton came in. I’m not certain what he meant and how sincere his intentions were, but he ran against Washington and he came to Washington and he got rolled.
One of my reasons for writing Arrogant Capital was to suggest that this incredible buildup of interest group centrism has made it impossible for these presidential level realignments to work.
Some people will say that if the Republicans elect a president in 1996, then they will basically have the whole set-up, and that then you can have this kind of upheaval. I think there’s a little bit of truth to that, because part of the upheaval simply involves the institutional revolutions and shaking Washington up.
But it’s difficult for me to see the Republicans leading a kind of revolution against the Washington lobbyists and interest groups. I don’t think they’re any more capable of leading that than the Democrats are. So I think we’re still going to have a problem, that the electoral upheavals can’t reach in to this interest group centrism successfully enough.
MM: How was it that Clinton got rolled?
Phillips: In part, he was self-rolled. He set himself up in different ways. It’s difficult to believe that he was 100 percent sincere in his outsider claims, because as soon as you start to see his modus operandi with all these Arkansas fat cats, it becomes clear that his way of dealing with things in Arkansas was to be part of the lobbyist crowd, to get contributions from the CEOs, and to basically work with them. In the context of Arkansas, he would have been slightly left of center, I suppose, but not in any way that he couldn’t work with Walton and Tyson and the whole crowd. He did. And Hillary was on the boards of some of those companies. So, we shouldn’t have believed it. He talked the talk, but he didn’t walk the walk.
When he came to Washington, who did he sign up? Lloyd Cutler, Ron Brown, Vernon Jordan, Mickey Kantor - obviously not people who were enemies of the lobbying establishment.
Then, when he did the tax and budget package, the administration made deal after deal after deal with lobbyists. They did the same thing on NAFTA. So basically, they legitimatized interest group politics by the way they behaved as well as the way he dealt with the insiders almost from the start.
MM: In Arrogant Capital, you label lobbying interests and other Washington establishments as a parasitic culture. Why did you use that label?
Phillips: Let me start with the reason that I use the term parasite. I found that it was a term that was used with regard to the population of previous capitals - Athens, Rome, Madrid, which even had what I would figure qualifies as the first thinktank. And talk about parasites! Madrid and Rome and The Hague in Holland - there are things in the book about the extraordinary extent to which capitals have prospered and attracted all the fortune seekers, and they continued to grow, or if you like, fester, even while the rest of the country is starting to thin down a bit. So that’s the reason for the term parasite. This is an old process.
There are 4 or 5 statistics concerning the Washington parasite culture that I like to toss out. The first is that there was a very loose census done by Professor James Thurber of American University, in which he found in the early 1990s that there were 91,000 people who were either lobbyists or engaged in supporting lobbying activities. The estimate was that right after World War II there were probably only a couple of thousand that would have fit in that category. There were something like 800 people admitted to that bar of Federal District Court of the District of Columbia in 1950, and by the early 1990s, it was 61,000. And of course Washington has emerged as having the highest per capita concentration of lawyers in the world. The congressional staff is up from 1,500 in the early 1930s to about 2,500 to 3,000 at the end of World War II to now over 20,000. The number of journalists is up from several hundred in the 1930s to 12,000 to 15,000 today. And the last statistic is that now seven of the richest per capita income counties in the United States are in metropolitan Washington.
MM: What then are your key proposals for political reform?
Phillips: I put ideas in the book based on the failures of previous leading economic powers, and what the problems were and how we might play around as a device for dealing with them. But I found that in the last 10 weeks, oddly enough, this is a debate whose time has come. There is all this discussion now of what we can move out of Washington, how we could dismantle the capital. I don’t know how much it matters, but it’s at least worth discussing. You can send congress home for six months of the year. You can let them vote from their home districts. There’s no reason why they couldn’t do that. Technology will support it. You could reduce the staff of congress that way. A lot of the lobbyists would have to find some other place to do their thing because nobody would need 91,000 of them if they’re only in Washington six months of the year. Things like that.
Where the new congress is not going to achieve very much in my opinion is beyond the first one or two points on the list.
My second group of proposals was to ease the separation of powers. It wasn’t very elaborate, but it basically suggested that you could let members of congress serve in the president’s cabinet, or, and this would require a major legal change, you could let members of congress actually hold official federal secretarial or subsecretarial posts. That would be a major change in practice, but it would allow congress and the executive branch to start coordinating more.
I also had a proposal that we might think of some way to be able to dissolve Congress and maybe have the president run again if a vote of confidence was lost.
The third point was the weakness of the party system. I had a number of things that I suggested, including a national referendum. I suggested that there be some kind of commission to figure out what it’s jurisdiction would be and whether congress would have a veto and so forth.
Polls that Time magazine recently took showed 76 percent to 19 percent - four to one - in favor of a national referendum mechanism. The other Anglo-Saxon countries are moving in the same direction, notwithstanding their shared tradition of representative government, partly because they are starting to see that representative government represents more interest groups than it does voters. We could put electoral reform, or things like NAFTA and GATT , before the public. Obviously the elites don’t want to do that. But the public would love it and would be happy to have it.
I like the idea of term limits, recalls, "none of the above" on the ballots. Where you get "none of the above" in a position to perform a useful service is in very lopsided Republican or Democratic districts where the incumbent is a total dud and it’s a safe district so the other party runs a total dud too and it doesn’t really matter. If you had "none of the above" there you would really have a chance to do it. Obviously the Ollie North vs. Chuck Robb race could have been a wonderful one for "none of the above."
Proportional representation is something I discussed. I think it might be useful to consider if we start having multiple presidential candidates or we start getting a couple of serious minor parties - not as big as the Republicans or Democrats, but ones that are really developing organizational thrust.
MM: Why do you put so little emphasis on campaign finance reform?
Phillips: If you look at the G-7 powers, you get a very real sense that it’s awfully hard to keep money out, and it sloshes almost no matter what you try to do to dehydrate it. In Germany , Italy and Japan , the political system is awash in money. Japan is worse than it is here. Italy was worse than it is here. In Britain and France there’s all kinds of private money in the system.
The other impediment is simply that people are so contemptuous of politicians these days, they don’t want to give them any money. So you don’t have any support for public financing. People do not accept the idea that if the money is coming from the public in fairly limited and regulated quantities, then the politicians won’t be able to do the games with private money that they do now.
MM: In Arrogant Capital, you link not just K Street but Wall Street to the current political paralysis, and you emphasize the financialization of America. What do you mean by that concept?
Phillips: My sense is that great economic powers in their heyday, as they start peaking and then start on a bit of a downcurve, usually see their manufacturing or their agriculture or their shipping - their physical commerce - start to lose ground because of the fascination that the country has with becoming the center of the international economy. This is whether it was Amsterdam, or London in the two decades before World War I.
The countries that are at this stage get into all kinds of inventions of financial gimmicks and instruments, and it tends to financialize in the sense that people are less concerned about actual work. They don’t want to build things. They want to manipulate things. There’s always a lot of pioneering by these cultures, and it’s all negative for the average person. It’s all financialization.
The ultimate financialization has come with the superelectronic age. Lower Manhattan has become the new Tortuga, which was the pirate center in the Caribbean in the seventeenth and eighteenth centuries. The investment firms can do more with modems and quotrons than Henry Morgan and Blackbeard and all the rest could do under the skull and bones.
The result of this financialization process, where more and more are sucked into the orbit of Wall Street and the financial sector, is that all kinds of people in different parts of the country start thinking about how they can do a leveraged buyout of their business, or how they can get in this or that speculative side. It is very striking in the business community how many people who worked hard as humdrum presidents of little companies in Springfield, Ohio wanted to get pulled into the orbit of finance and somehow sell out or do a leveraged buyout. That was the way to go instead of being somebody who retired as having merely made good money for 20 or 30 years.
MM: How does financialization affect the average person?
Phillips: What we began to see, even before the rise of electronic finance, was the breakdown of employees getting the rewards of their productivity, and more and more of the profits in companies being taken by the top small group of managers. And whereas the CEOs of companies averaged 25 to 40 times the pay of the average worker back, say, in 1970, by the mid-to-late 1980s, you were looking at ratios like 120, 130, 140 to 1.
One of the reasons for this was the extent to which the senior people in companies were getting caught up in the whole financialization process. They wanted to get into buyouts. They wanted big salaries. They wanted deals. They wanted options. They’ve talked about golden parachutes.
A whole mindset developed in companies that had very little to do with whether you were actually making things that society needed or employing a lot of people or giving strength to a community. What counted was how much money you could get in your bonus, and how high you could get your stock price.
In the name of competitiveness and global problems, which obviously were very substantial, an awful lot of stuff was justified that was really just aimed at increasing the price of a company’s stock. When Xerox laid off 11,000 or so a year or two ago, their stock price went up about 7, 8 or 9 percent very quickly. The CEO’s bonus increased because the stock price increased. So in essence, he got a bonus from laying people off.
This undercuts the fabric and pulls things apart. There are all kinds of examples of the way this has worked against the average person. You have banks getting away with paying 2.75 percent on deposits while they charge 17 percent on credit cards, and politicians back off regulating this because it might upset the stock market. Pension funds have been undermined. There’s just a whole mindset out there that grew up around the assumption that all this was acceptable and even useful.
MM: What other cultural shifts take place among elites in declining powers?
Phillips: You internationalize. You lose your parochialism. In the early stages of the rise to power, you’ve got countries, whether it was Rome, Holland, Britain or the United States, that were somewhat Puritan, that worked very hard. But as the country hits its peak, it becomes the center of the world. It becomes much more fashionable and internationally oriented, especially the elites. You get much more permissiveness. There is a sense of luxury, of sophistication. It’s been fascinating to me how the Dutch and the British and the Americans, in succession, as they reached a relative peak of prosperity and sophistication, all became more interested in things French, not least French cooking and restaurants.
The other thing that happens is that people get caught up in the sophistication and economic opportunity of global finance and investment. And as a country tends to peak, investors don’t get as much money from investing in the weakening parts of their own economy. So they want to ship it overseas. The Dutch financed a lot of the growth of Britain; they were major stockholders in the East India Company and the Bank of England. Then the British did, right before World War I; one of the reasons why their industry was aging was that they would rather put money into a tea plantation in Ceylon or a railroad in the Argentina, or for that matter, even something in Germany. They wouldn’t invest it at home.
This whole sense of internationalism and sophistication removes the elites from a commonality with their own peoples. They don’t care about decay in the Great Lakes or in the north of England, or in the old textile centers of Holland. It’s much more exciting to worry about where you can put your money 4,000 miles away.
MM: What are your economically oriented reform proposals?
Phillips: I suppose you could divide it in three parts. First, there’s a suggestion that we have to be very careful about how we globalize and pursue the glories of internationalization, because you’re exposing a major element of the population to competition that they really can’t deal with.
This is done in the name of globalizing the economy and sophistication and progress, but actually helps the 1, 2, 5 or 10 percent who have capital skills and education, whether it’s the trade consultant, or the international ship broker, or the commoditity company that trades globally, or Goldman Sachs or First Boston. There are other people who lose the standard of living they enjoyed 10 to 20 to 30 years ago. As we accept globalization, more and more people in the midsection of the population may have slightly cheaper sweatshirts coming in from China, but somehow or another their whole standard of living is stabilized or heading down, and their children don’t have the opportunities, and both parents are working to keep the same income coming in.
The next part is the question of how to deal with the tax policy. I think if one thing is clear in the tax system at this point, it’s that the highest marginal rates are now imposed on the lower upper class, the upper middle class, whatever you want to call it - the people who are in the top 1 percent, but not in the top one-fifth of 1 percent. At $300,000 to $400,000 a year, the 39.6 percent top rate applies, but the deductions and exemptions are being phased out so that the real rate is like 44 to 45 percent. Whereas the people at the top who make their money out of investments are basically paying 28 percent. Since it’s not earned income, they don’t have to pay a Medicare tax. It’s extraordinary how the highest marginal rates are on people who actually work, and who are not in the richest 100,000 families.
When Franklin D. Roosevelt in 1935 passed something he called the Wealth Tax Act through Congress, it had three or four different rates applying to the top 1 percent. They recognized in that tax package that a successful surgeon in some suburb who was just barely inside the top 1 percent shouldn’t have to pay anything like the rate that was imposed on a Mellon or a Rockefeller. So in the mid-1930s, the bottom of the top 1 percent paid about a 15 percent rate. But by the time you got to the top of the 1 percent where you were looking at the richest families in the country, people who made several million dollars a year, and they paid 70 percent. That recognizes a difference that has been deliberately suppressed right now. If anything, we have the reverse.
The last point is to look at the question of the deficit. If it’s a question of reducing the deficit from $200 billion a year down to $140 billion or something, which would have a helpful impact on the financial markets, the people who make the money ought to be paying for the process.
We could have transfer taxes on financial transactions. You could change the way estates are taxed, taxing individuals rather than estates. You could have a higher top rate. For incomes over $1 million, you could put that up to 45 percent or something.
MM: How to you assess the prospects for a new American revolution?
Phillips: We actually saw the beginnings of some of this upheaval on November 8. I don’t think that the Republican contract is going to be all that successful, and as I suggested, I think there are parts of it that are weak and potentially counterproductive. But in terms of the reforms in Congress, and shaking up and emptying out the Democrats’ 40-year stagnant bathtub in the House of Representatives, I think that is useful. I think the Republicans represent reformist elements in some way vis-a-vis Congress.
Now the other stuff they’ll do, they’ll try to move toward elite viewpoints in economics. I’m not sure about the globalization process, but if you listen to somebody like James Baker, it’s the greatest thing since sliced bread; I guess it is if you’re a corporate lawyer. I don’t see that they’re likely to do anything particularly constructive there. They’ll try and take care of their lobbies.
I think that they’ll lose some credibility. People will say, "Well, we got rid of Bush in 1992 because we were tired of him. We took congress away from Clinton because he was a waste of time in 1994. Now, guess what’s happened again. We’ve got another set of people who’ve delivered more for lobbyists than for voters."
At that point, I think you’re going to see people anxious to discuss broader reforms. So I think that this congress is going to make some small useful procedural reforms. But in a larger sense, it’s going to catalyze some forms of economic economic arrogance and abuse that haven’t been catalyzed before. At the same time, the Democrats will for the first time be shorn of all their lobbyist pals and their K Street white envelopes and their secure little castle in the House of Representatives, and they will have to rediscover the average person. That also may provide a political spur. So I think a lot of yeast is in place and I hope it rises in a successful way. n
IT’S A FIVE-DAY WALK from the nearest road to get to the proposed site of the Arun III dam in the pristine Arun River valley in western Nepal. That will soon change if plans are carried out to construct a planned 74.4 mile-long access road through the valley. The road and the rest of the dam project are expected to generate an influx of up to 10,000 construction workers and their families who will jeopardize the lives and cultures of 450,000 indigenous people and threaten over 100 species of endangered and rare flora and fauna.
Although the Arun III project is the first in a series of three dams scheduled to be built in the valley, there has been no cumulative environmental impact assessment for the entire scheme.
The World Bank is slated to lend $175 million for the massive hydroelectric project; other major donors include the Asian Development Bank ($127 million), Japanese Overseas Economic Cooperation Fund ($163.3 million) and Germany’s KFW ($124.4 million).
On October 24, the Arun Concerned Group (ACG), a coalition of Nepalese non-governmental organizations filed the first claim against the World Bank in the newly created Inspection Panel, an independent appeals mechanism set up by the Bank to investigate claims from people directly affected by Bank projects. The ACG claim charges that the Bank violated its policies and procedures during the preparation of the Arun III hydroelectric project.
The ACG believes that there are alternatives to the project that are less expensive, less environmentally and socially damaging, and that would have the advantage of building domestic industrial capacity and developing hydropower more evenly throughout Nepal. While Arun III will be largely dependent on international contractors, the ACG contends that a range of small to medium dams could be planned, built and run by domestic companies. ACG questions the prudence of building the $1 billion project - which is almost one and half times the annual national budget of Nepal. The claim against the Bank submits that the Bank violated its policies on economic evaluation of projects, as well as policies in other areas such as energy, information disclosure, environment and indigenous people during the preparation of Arun III.
"It is highly risky for a weak economy such as Nepal to put all funding into one costly project" says Bikash Pandey, an engineer with Alliance for Energy, a Nepalese non-governmental organization. "It’s no exaggeration to say that Nepal’s economic future is at stake," warns Gopal Siwakoti, a lawyer with the Arun Concerned Group. "Nepal is a poor country and this megaproject is completely inappropriate for it. But the World Bank is ignoring viable alternatives that will meet our energy needs at a lower cost."
Local hydro experts such as those affiliated with the Alliance for Energy have been promoting alternatives to Arun III for more than a year. The Alliance for Energy has put forward to the Bank and the Nepalese government a concrete set of alternative proposals which include small and medium scale dam projects of up to 100 megawatts, which could be developed in a number of river basins spread evenly throughout Nepal and could easily meet the growing demand for electricity. These projects could be developed and built in less time than Arun III, and would have the advantage of providing electricity to rural communities. According to the Alliance, the alternatives would be less environmentally harmful because the proposed sites are already near existing roads.
The U.S. government has also questioned the wisdom and economics of the project in a recent draft report released by the U.S. Agency for International Development in October 1994. The study contradicted the World Bank’s analyses of Arun III. It said that Arun was not the lowest cost solution to the problem of Nepal’s future power generation and that at this juncture Arun III would be a risky investment for Nepal. The study raised a series of questions about the Bank’s economic analysis and risk assessment and concluded, "The thrust of all our results is that a prudent planner would postpone the construction of Arun by several years while developing credible responses to these as yet unanswered questions." The study was requested by the U.S. Executive Director to the World Bank, who will be one of 24 Executive Directors to vote on project approval.
Concerns about the high cost of the project have even generated controversy inside the Bank. The issue is reported to have polarized the entire South Asia Country Department, which includes Nepal, Bhutan and Bangladesh . Martin Karcher, a World Bank division chief in the South Asia Country Department quit his job over his strongly held belief that the project would put Nepal at unnecessary economic risk.
In a September 1994 interview with the Environmental Defense Fund (EDF), Karcher asserted that the high cost of the project could displace important future investments in Nepal in social sectors such as health, education and nutrition. Karcher stated that Bank management gave him little support in attempting to develop a targeted poverty alleviation program in Nepal, while focusing intensively on Arun. "My feeling was that the project was not being handled in an objective and even-handed manner," Karcher said. "Since senior management seemed committed to the project, a serious and open debate was no longer possible, and even common sense questions were being dismissed. All the available energy went into building the case in favor of the project, rather than examining alternatives."
The World Bank responded to Karcher’s interview by claiming that his views were outdated and that the Bank had since revised its economic analysis for Arun III. However, Karcher has stuck to his original charges. "The project is not in conformity with the Bank’s poverty alleviation strategy for Nepal," said Karcher. "Its an unbalanced use of Bank funds with an overemphasis on energy which will crowd out investments in the social sector and other high priorities such as rural infrastructure and agriculture."
In 1993, the World Bank was forced to withdraw from the Sardar Sarovar (Narmada) dam in India after years of intense international and Indian public pressure. The withdrawal was widely viewed as a major victory for environmental and human rights activists. But the Bank wants to be sure the Narmada withdrawal did not set a precedent for major infrastructure projects and is using Arun III as its proving ground. Joe Wood, the Bank’s vice president for South Asia, has made several public statements to the effect that the Bank’s credibility as a funding partner for large- scale and controversial infrastructure projects is at stake, and if the Bank backs down on Arun it will become more difficult in the future for Bank management to bring large-scale projects before the Board of Executive Directors for approval. "If we don’t do it, the signal we’d send out is that the Bank can no longer support infrastructure projects like this," said Wood in a recent interview with the Wall Street Journal. "That would take away what the Bank can do for small counties like Nepal, which have no other source of financing to turn to." But the credibility of the Arun project in the eyes of key bilateral co- funders such as the Japanese government is a more immediate problem for the Bank.
The Japanese government’s Overseas Economic Cooperation Fund (OECF), one of the bilateral funders of the Arun III project, was also stung by international criticism for its co-financing role in the discredited Sardar Sarovar dam and is now indecisive on Arun III. The Government of Japan jolted Bank confidence in July 1994 by informing Bank officials that it would not publicly commit itself to co-financing the Arun project until it completed its own independent assessment of the project. This caused the World Bank to postpone the July 26 board approval date, which has not been rescheduled.
In August, in a highly unusual move, the Japanese government sent two separate delegations to Nepal to conduct assessments and meet with Nepalese officials and non-governmental representatives. One team was from the Overseas Economic Cooperation Fund and the second team included Bureau Directors from the Ministries of Finance, Foreign Affairs and International Trade and Industry. The participation of such high-level Japanese officials in this type of investigation is unprecedented. In the wake of these moves from the Japanese government, the Bank has been working aggressively behind the scenes to convince the Japanese to fund the project.
The Arun III debate is occurring at a politically volatile time inside Nepal. In July, Prime Minister Korirala resigned and disbanded the parliament. Even though there was only a "caretaker" government in place, Bank management seemed determined to continue with project preparation and approval. On October 18, 1994, the chief opposition leader in Nepal, Communist Party head Madhav Kumar Nepal, wrote to Lewis Preston, expressing his concern over the perceived attempt to lock in a deal on Arun III before a permanent government is in place. "Formal and meaningful discussion about the proposed project with the availability of basic project documents and information in advance has not yet taken place in Parliament," he wrote, adding that "Arun III must be reviewed by the new government in light of the ongoing controversies before Nepal makes any commitment to such projects." National elections inside Nepal took place on November 15th and the Communist Party won the most seats in parliament and is forming the new government. This development could change the debate on Arun inside Nepal.
Out of all the recent developments around Arun III, one of the most critical for the Bank will be its actions vis-a-vis its own inspection panel. The inspection panel was set up by Executive Directors in the wake of the Narmada controversy to act as an independent mechanism to investigate complaints about Bank management’s violations of internal policy and procedures. Non-governmental organizations, donor governments and legislators are all monitoring the development of this untested public accountability mechanism. If the Bank approves the Arun III project before the panel investigates the extensive Arun III complaints, it could undermine the effectiveness of the panel and the credibility of the Bank’s stated commitment to public accountability. n
EDF: In view of the Bank’s claim that poverty alleviation, and specifically your area, population and human resources development, are its first priority, what is the rationale for funding this mega- project?
Karcher: The basic rationale for the Arun project is that it will help generate economic growth, because you need electricity in order to promote industrial growth, including small scale industry and tourism. Let me make clear at the outset that I am not against the development of power in Nepal.
The country needs power, but what is at issue, in my mind, is the scale of the investments and the nature of risks one is taking with such a large project.
A related concern has to do with the fact that, whereas the World Development Report of 1990 calls for labor-intensive growth (labor often being the most plentiful resource in poor countries), I do not see that such large investments in the power sector lead to labor-intensive growth, certainly not in the short to medium term. Therefore, it seems to me that the government and the donors need to consider alternative investment programs and a more balanced pattern of development, which would generate more productive employment, particularly among the poor.
EDF: With total project costs close to $760 million, more than Nepal’s entire annual budget, is the project not likely to crowd out many of the social investments that your division is interested in, such as expenditures for education, health and human resource development?
Karcher: Even though the costs of the Arun project will be spread over eight or nine years, that has been a real concern of mine.
In Nepal, human resource development is still at a very early stage. The levels of education and health services, family planning services are still so inadequate that major investments are required. Nepal is presently developing the potential to expand those services quite rapidly.
My main concern has been about what happens in the medium term. When you have developed the capacity to provide better primary education, improve secondary and higher education and provide health and family planning services at the village level to reach very poor women, large investments in the power sector, once having started, are liable to crowd out investments in the social sectors.
It’s possible to construct scenarios where that will not happen, but they usually rest on rather optimistic assumptions. The latest country economic memorandum of the World Bank on Nepal, issued last March, describes the set of measures the government of Nepal would have to implement over the next 10 or 12 years in order to avoid the crowding-out impact. I personally fear that those measures, which include revenue mobilization, strict recurrent expenditure control, investment prioritization and steep tariff increases, may be very difficult to implement and to sustain over a long period of time. I’m not casting doubts on the good intentions of the government of Nepal, but if and when the crunch comes, then I think there is a significant risk that the government will have to cut back on its priority programs in the social sectors, as well as in some other important sectors. Prudence would argue in favor of less risky alternatives.
EDF: What do you think of the economic analysis of the project?
Karcher: I have some serious reservations about the economic analysis. First, it was difficult to get hold of the economic analysis until quite late in the project processing cycle. Somehow that information wasn’t being shared very readily.
Then, in January 1994, when we finally did get a copy of the draft staff appraisal report for the project, I found many problems with the analysis. At the sectoral level, there was no clarity as to what the composition of the government’s overall investment program in power actually was and to what extent it was designed to serve export needs in addition to domestic consumption. Let us take it that the power development program was designed to meet domestic consumption. ... Why is it not equally important, perhaps even more important, to meet the needs for primary education, for water supply or for family planning services? Why is electricity consumption, a significant proportion of which goes to the better- off urban dwellers, more important than the needs of the poor, especially for an institution like the Bank which is primarily concerned about poverty alleviation?
EDF: What do you think about the estimated economic rate of return of 15.4 percent?
Karcher: I have not seen the latest documents. I had major concerns about the economic analysis which was first shared back in January. The methodology was based on the consumers’ willingness to pay for electric power. First of all, how does one estimate that? What is the shape of the demand curve?
When I looked at the imputed economic value of a kilowatt hour in Nepal, I found that on average this was about seven and a half times what consumers were paying and I was wondering how is it possible that you can assume that the average Nepalese consumer would be willing to pay something like 53 cents per kilowatt hour, when we in Washington pay something like 7 or 8 cents? Obviously, if you use these kinds of values, any project becomes feasible and justified.
EDF: If there is this eight-fold higher figure for the cost of a kilowatt hour in Nepal as compared to Washington, obviously, this strains anyone’s credibility. How can the task manager and the country manager proceed with such a project?
Karcher: The economic analysis had to be redone. The problem, however, with waiting until such a late stage in the project before doing a proper economic analysis is that the opportunity to use the results of the analysis to shape the design of the investment program is then lost. The analysis merely serves to justify the project after the fact. ...
Besides electric power, there are other important unmet needs in Nepal. Demand for electricity can be moderated simply by reducing the rate of new household connections. This may allow for meeting other priorities such as highway maintenance, for instance. ...
On my last trip in the country, while visiting primary schools being constructed with World Bank assistance, we found that on some stretches of road it was easier for us to drive alongside the road than on the road itself. I mention this to illustrate that the resource requirements just to preserve the existing stock of capital are enormous in Nepal, and we know from experience that the economic rates of return on road maintenance and rehabilitation programs are significantly above 15 percent.
Similarly, World Bank studies have found that investments in human resource development yield even higher returns, especially in low-income countries. Under those circumstances, how do we justify using an opportunity cost of capital as low as 10 percent if there are significant funding gaps and risks that such gaps will continue to exist? When I raised the question of using a higher opportunity cost of capital against which to assess the Arun project, I was told: "We have always used 10 percent; why change for this project?" I do not consider this a satisfactory answer to my question. This is not just an esoteric, theoretical question. It has practical consequences regarding the composition of the government’s investment program. The higher the opportunity cost of capital, the less attractive the large capital-intensive hydro-projects become.
EDF: When you have had various questions about the affordability of the project, has there been a response?
Karcher: I think I got a hearing. I want to be fair. If you look at the most recent country economic report, it is basically a public expenditure review for Nepal. It tries to see if the government proceeds with its full investment program in the power sector, including Arun, what the likely crowding out impact will be, and what measures the government will need to take in order to accommodate such large investments.
The bulk of the report is on that issue, and we were consulted, in the social sectors, about the needs. Initially, we were given an envelope for social sector investments which assumed a 5 percent real growth in social sector investments. We said this was absolutely insufficient, that if investments in the social sector only grow by 5 percent a year, the government would not even be able to meet its commitments under the basic and primary education project that IDA is funding, and it would not be able to invest as much in the health and population sector. So it was decided that the social sectors would get an 8 percent rate of increase. ...
In real terms that means something. But it doesn’t allow for a major expansion, say, in the number of teachers. It doesn’t allow catching up with the huge backlog of children who don’t attend school. It is sufficient to invest in quality improvements in education, but not in an expansion of the primary education sector [or for an] expansion of secondary education, which, on the basis of a report which the Bank has just completed, is another area where the needs are extremely large.
Moreover, in order to carve out the budgetary resources required to allow for an 8 percent yearly expansion in social sector spending, the government would have to implement and sustain a number of very difficult revenue mobilization and expenditure prioritization and control measures. They would need to achieve an unprecedented, high level of economic management and performance for Nepal.
EDF: Has your decision to retire from the Bank had anything to do with how the Arun project was handled and managed at the Bank?
Karcher: Yes it has. It was not an easy decision, after 29 years with an institution that provided me with tremendous opportunities for professional growth.
My feeling was that the project was not being handled in an objective and even-handed manner. Since senior management seemed to be committed to the project, a serious and open debate was no longer possible and even common sense questions were being dismissed. All the available energy went into building the case in favor of the project, rather than examining alternatives.
By contrast, we received very little management support in our attempt to assist the government to formulate a targeted poverty alleviation strategy and program directed at those people who are too poor to participate in economic development.
As division chief and a member of the department’s management team, I felt I shared in the responsibility for the decisions taken in the department, particularly for such momentous decisions as the power sector investment program, which can affect the fate of the whole country. And since I had serious reservations and misgivings, I felt that one way of making that statement more effectively than through my previous memos would be to say I no longer want to be part of the decision-making process.
A COMPANY’S ACCOUNTANT is entrusted to record information about financial transactions, summarize the data and prepare reports for the public based on rules established by the profession and government. Unfortunately, the accountant possesses a bag of tricks which enables him or her to manipulate financial data to make the company look healthier than it is. The process of artificially pumping up net income or net assets is known as "cooking the books."
The company hires external auditors as independent watchdogs to assure the investing and lending public that the financial statements are free of material misstatement. The auditors are supposed to review the company’s financial statements and internal controls and issue opinions about the quality of the reports. Auditing standards are also established by the profession and government.
The "Big Six" auditors are the major players in the worldwide auditing game. Headquartered in the United States, these companies are organized as partnerships, so they are not required to disclose information about their operations to the public. A spokesperson for one of the Big Six, Arthur Andersen, even refuses to identify the countries in which the firm operates, claiming it is proprietary information.
The Big Six firms have been key players in a recent spate of audit failures around the world which are beginning to undermine the internal system of accountability on which the business world relies. But instead of focusing on improving their practices and regaining the public’s trust, the Big Six have launched a full-scale campaign to reduce their liability for failed audits.
Auditing firms claim that they are sued not because of bad audits, but because, unlike their bankrupt clients, they have the money to pay aggrieved shareholders and other creditors. Testifying at an August 1994 U.S. House of Representatives committee hearing on a bill that would have limited auditor liability, J. Michael Cook, chair and chief executive officer of Deloitte & Touche explained, "We are joined in the suit because ... we are viewed as a ‘deep pocket’ whose supposed resources make the litigation financially worthwhile to the plaintiff’s lawyers." He admitted that "mistakes were made" by the auditing firms, but recommended that the hearing "should not focus on finger-pointing about errors in the past."
S & L complicity
Deloitte & Touche is hardly well positioned to argue for letting auditing bygones be bygones, however. U.S. government regulators have connected the firm to a number of savings and loans failures.
In March 1994, Deloitte & Touche agreed to pay $312 million to settle $1.8 billion in lawsuits and other claims brought by U.S. bank regulators. At the time, the Office of Thrift Supervision (OTS) issued a 120-page report detailing the firm’s alleged violations. Among the OTS’s allegations:
o Franklin Savings Association improperly deferred recognition of at least $119 million in losses on financial futures contracts. According to the OTS, even though Deloitte & Touche was aware of Franklin’s improper accounting practices, Deloitte’s audit opinion declared that the financial statements were fairly presented in conformity with generally accepted accounting principles.
o Columbia Savings and Loan Association classified its bond portfolio as an investment account, but should have classified it as a trading account. (Gains and losses on investment accounts are recorded in the accounting records when the investment is sold; gains and losses on trading accounts are recorded when the market value changes.) As a result, Columbia recorded $45.3 million in gains on sales of corporate bonds even though the bank actually had unrealized losses of $159 million. (Trading account losses are recorded when the market price of the bonds drops, even though the losses are unrealized until the bonds are sold.) According to the OTS, Deloitte & Touche failed to seek and examine competent evidence and instead accepted Columbia’s classification and method of accounting for its bonds.
o Deloitte failed to review and analyze properly City Federal Savings Bank’s allowances for loan losses, which are established to reflect estimates of outstanding loans that will not be collected. It therefore failed to discover that City Federal’s allowances were understated by at least $55 million.
o Deloitte & Touche permits its auditors to discard preliminary documentation prepared in connection with audits of insured depository institutions. In violation of generally accepted auditing standards, adequate records of the work performed and procedures applied did not exist because information from the destroyed documents was not included in the audit workpapers.
Deloitte & Touche consented to the OTS’s order without admitting or denying any of the allegations.
The audit failures illustrated by Deloitte & Touche’s shady past are not unique to the United States. The Big Six have settled and face charges around the world:
o In a letter to civil servants, the chief accountancy adviser to the British Treasury warned against awarding public sector contracts to 13 Deloitte & Touche professionals. The blacklisting is believed to be connected to the government’s legal efforts against the firm to recover $234 million that the government paid investors in Barlow Clowes, a fund management company that Deloitte & Touche audited and which later collapsed.
o In Ireland, Ernst & Whinney (now Ernst & Young) reached an out-of-court settlement for $118 million with AIB Group, Ireland ’s largest bank and administrator of the Insurance Corporation of Ireland. AIB accused Ernst of negligence when the bank discovered that an insurance company, audited by Ernst, that it had purchased just 12 months previously faced serious and unexpected losses on its underwriting business.
o KPMG was accused of faulty auditing which contributed to the $2.1 billion crash of Tricontinental, the merchant-banking arm of the State Bank of Victoria in Australia. The firm reached an out-of-court settlement for $106 million, but claimed that it had conducted its audit properly and that the audit did not extend the problem which led to the bank losses.
o The Spanish Institute of Accounting and Auditing recommended that Coopers & Lybrand be fined $300,000 due to alleged infringements of accounting norms in its audits of the Kuwait Investment Office’s Spanish holding company, Torras Group. Torras’ accounts, initially audited by Coopers, had shown profits of $31.8 million. At the request of Torras’ new management, Coopers & Lybrand performed a subsequent audit that reported losses of $218 million. Coopers denies negligence, arguing that its previous audit report had included "qualifications," or concerns about the company’s accounting practices or internal controls.
o In the United Kingdom , groups of Lloyd’s of London investors, called "names," have sued Ernst & Young and have authorized legal proceedings against Arthur Andersen for alleged negligence in their auditing of Lloyd’s. The names claim in a suit that the auditors "were negligent in that they failed to prevent under-reserving in earlier years of account, failed to identify the inadequacies of the reinsurance policies, and failed to identify the inadequacies of the manner in which the underwriting affairs were being conducted." The riskiness of the operation was therefore unknown. Ironically, the auditing firms’ professional indemnity insurance is underwritten at Lloyd’s - so the names may be suing themselves.
Who examines the examiners?
At times, the Big Six find themselves on opposite sides of audit cases. For example, in the United Kingdom, Deloitte & Touche received a writ from Price Waterhouse, the administrators of the close-out of failed computer leasing company Atlantic Computers, over an audit of the company. Price issued the writ because the firm expected legal action by Ernst & Young, the administrators of Atlantic’s former parent company, British & Commonwealth. Ernst & Young alleged that Atlantic had misstated its financial position when Atlantic was purchased by British & Commonwealth. In a simultaneous British case, the plaintiff/defendant roles have been reversed: Price Waterhouse faces approximately $12.5 billion in legal claims from the Deloitte & Touche liquidators of the collapsed Bank of Credit and Commerce International over Price’s audit of the bank.
In Italy, shareholders in the agrochemical group Ferruzzi Finanziaria and its industrial subsidiary Montedison plan to suePrice Waterhouse in the wake of the administrator of Ferruzzi and Montedison’s finding of serious oversights in Price Waterhouse audits of the group’s accounts over a number of years. He outlined a catalog of accounting malpractices, including: an irrecoverable credit of $261 million to a company in the British Virgin Islands, recognition of revenues of $146 million on nonexistent sales and huge undocumented payments to offshore companies, supposedly for consulting work. Many of the accounting irregularities were brought to light by fellow Big Six firm Deloitte & Touche.
But with Big Six firms alternatively filing and facing charges involving their fellow Big Six firms, questions of independence inevitably arise: are the firms actually shielding each other? In the United States, for example, First Home Savings Bank filed a lawsuit alleging that KPMG and Deloitte & Touche had conspired to cover up substandard audit work. The lawsuit accuses Deloitte & Touche of negligence in failing to detect an embezzlement of $6 million. For two years, Deloitte & Touche repeatedly refused to turn over key documents and finally said that a significant portion of them had been destroyed in a fire. First Home claims in its lawsuit that KPMG’s initial report on Deloitte & Touche’s audit work had stated that Deloitte had "failed to exercise due professional care in the performance of its examination." The lawsuit also alleges that KPMG removed the negative conclusions and agreed not to make any negative statements about Deloitte’s work, even if KPMG discovered negligence by the accounting firm. KPMG and Deloitte deny the conspiracy charges. According to a KPMG spokesperson, "The client obviously got a report from us that they didn’t like and have now resorted to making absurd charges against us."
Seeking relief worldwide
As the Big Six face and file mounting charges of audit negligence worldwide, they have banded together to pressure national governments to reduce accounting firms’ liability for bad audits. The firms claim that shareholders and other parties injured when a company fails sue the auditors because the auditors are believed to have "deep pockets" - money to pay settlements.
In March 1994, with heavy backing from the Big Six, Christopher Dodd, D-Connecticut, introduced the misnamed Private Securities Litigation Reform Act of 1994 in the U.S. Senate. If passed, the legislation would have made it much harder for stockholders to bring suits against those responsible for company losses - including not only boards of directors, but auditors. Specific provisions of the bill would have:
o excluded small stockholders from filing claims;
o imposed the winner’s fees and costs on the losing party if the loser refused to proceed under an alternative dispute resolution procedure, thus making participating in a class action suit too risky for many victims;
o required plaintiffs to demonstrate the state of mind of each defendant at the time the alleged violation occurred;
o modified the joint and several liability rule to require that damages be proportioned according to each party’s degree of responsibility. (Joint and several rules assume that a fraud could not have occurred if at least one of the participants had revealed its existence. Therefore, all participants are equally responsible for the outcome of the fraud and each is 100 percent liable for any damages. The proposed modification would mean injured plaintiff shareholders in a bankrupt company could not recover the full cost of their damages from the audit firms which failed to uncover improper accounting practices that contributed to the company’s bankruptcy.); and
o limited the time period in which an action for loss could be launched.
The bill did not reach the floor of the Senate, but accountants are hoping for favorable action in the next session of Congress. To that end, the Big Six and their trade association spent $2.3 million in campaign contributions to support House and Senate candidates in the recent election. The largest slice of the Big Six action came from Ernst & Young’s political action committee (PAC), which paid a total of $346,210 to 283 federal candidates. The biggest winner of the accountants’ PAC payout was Representative Billy Tauzin, D-Louisiana, who introduced a House bill similar to the Senate’s last session; he received $70,000.
On the other side of the globe, the New Zealand Society of Accountants is pushing for a similar set of proposals to limit auditors’ liability. The Society has moved away from its original idea of a liability cap. Instead, it has proposed a wish list of measures, including:
o the incorporation of accounting firms, which would insulate auditors’ personal assets from liability suits;
o modification of the joint and several liability rules for accounting firms;
o introduction of the concept of contributory negligence for the assessment of losses; and
o a cap on the amount of time in which victims could file claims.
Those in the New Zealand government "are going to have to do something," a partner at Ernst & Young told The Accountant, calling the mounting negligence claims against auditors "absolutely ridiculous."
Investors strike back
Investors are starting to fight back against auditing failures and the auditors’ political offensive. For example, fed up with the state of auditing in Canada , the Canadian Investor Protection Fund, a $75 million trust established in 1969 by Canadian stock exchanges, has started to develop its own auditing examination; only auditors who pass it will be permitted to audit Canada’s brokers and investment dealers. In addition, the Fund is revising its uniform audit instructions and plans to spell out more forcefully how extensive audits must be before auditors can vouch for companies’ accounting practices.
According to Donald Leslie, the Fund’s president, "We have found that the quantity of [audit] work has declined to the extent that the statistical probability of an auditor detecting a material error, if it exists, is now often less than the flip of a coin - or 50 percent. ... Over the past 20 years, [the amount of work done in an audit] has been gradually reduced by perhaps as much as 50 to 75 percent." He claims, for example, that an auditor used to inspect inventory at 10 client locations, but now might count it at only three.
Meanwhile, working counter to the Fund is the Canadian Institute of Chartered Accountants (CICA), which is calling for the standard package of reforms, including modification of the joint and several rule and incorporation and other limits on the liability of individual partners. According to CICA, "We believe that the public’s interest is best served when management, directors and auditors can play their respective roles without fear of unreasonable liability."
The international auditing firms are supposed to serve as independent watchdogs, exposing corporate abuses worldwide. But they are failing to live up to the level of public trust that their profession should engender. The changed perception is well illustrated by Donald Leslie, president of the Canadian Investor Protection Fund, who claims, "Twenty years ago, when I looked at audited financial statements, I was able to put a lot of faith in them. Now, I don’t trust them at all."
The Big Six Auditing Firms and the Number of Countries in which they Operate
Arthur Anderson 74
Coopers & Lybrand 120
Deloitte & Touche 108
Ernst & Young 164
KPMG Peat Marwick 110
Price Waterhouse 117
Comeback: The Fall and Rise of the American Automobile Industry.
By Paul Ingrassia and Joseph B. White.
New York: Simon & Shuster, 1994.
496 pages. $25.
Reviewed by Steve Farnsworth
FEW INDUSTRIES BEAR THE STAMP OF U.S. CAPITALISM as strongly as does the U.S. auto industry. From the start of the industry a century ago, U.S. entrepreneurs envisioned making cars fit middle-class budgets to push the market beyond its initial niche of providing expensive playthings for the rich.
Throughout this century, the power of mass production turned U.S. car makers into both the best of industries and the worst of industries. Some U.S. car companies were incredibly rich, while other were so poor that they went out of business or survived only because of a federal bailout. Auto makers may be innovative in terms of design and engine performance, but they have been criminally lazy when it came to making safer cars.
The automobile-powered American dream of wide yards and home ownership in the suburbs came with traffic jams and smog. New roads were built through the hearts of old neighborhoods, and that spurred ever more suburban growth.
General Motors , Ford and Chrysler and their customers did much to trigger these fundamental changes. But the success of the Big Three eventually gave way to an arrogance and a corporate flabbiness that made the industry an easy target for Honda , Toyota and other foreign producers.
The first two-thirds of Comeback reads like a less humorous version of the popular film "Roger and Me,’’ as the authors demonstrate how corporate executives, with their immense egos and incredible stubbornness, combined to push the U.S. automotive industry to the brink of disaster.
Unlike that film, which focused on working-class suffering resulting from corporate misconduct, this book’s focus is on the executives suites. But the stories can be just as amazing: particularly the obsessive Machiavellian posturing of corporate underlings throughout the time GM’s market share plunged.
The headquarters office stories in Comeback are both tragic and comical. We learn how Bob Stempel feared to build a leaner, meaner GM, and how the company’s board of directors sent him packing. We read of Lee Iacocca’s apparent amazement at the existence of self-service filling stations, developed during the decades others tended to his gas tank at Ford and Chrysler.
The final third of the book suggests that U.S. auto makers learned some lessons from their Japanese competitors. Quality is a much higher priority in today’s Detroit, as are fuel efficiency and innovative design.
Recently, the Japanese auto makers have been hobbled by a high-priced yen, which boosts the price of imports in the United States, and by complacency caused by their own past successes. The authors suggest the Japanese companies might have learned some lessons, though not entirely good ones, from U.S. firms.
Comeback would have been even stronger if it had spent more time discussing the present, and perhaps better predicting Detroit’s future, and had spent less time recounting the past, particularly the relatively well-known GM management shake-up.
The two authors, Pulitzer Prize-winning reporters for The Wall Street Journal, provide a careful view of Detroit management. But they don’t write all that much about other important parts of the automaking story, particularly unions, the environment and the continuing battle over building safer vehicles.
Safer vehicles are an important issue to many of the people who actually buy cars and trucks, but they seem an afterthought to executives in this industry, who dragged their feet in adopting basic technologies like seatbelts, and later airbags. If the authors had spent a bit less time in the corporate suites, they might have recognized the need to cover this issue in greater depth.
Similarly, environmental issues get short shrift in this book. Efforts are underway to build and market electric and natural gas-powered vehicles for middle-income consumers, but you can’t learn much about those efforts here either.
Since Detroit seems in this book to be bumbling through both success and failure, one might wonder whether a revived Detroit arrogance can turn this latest revival into another fall. Indeed, issues like making safety an afterthought, or poor labor-management relations might just lead to a replay of the 1970s and 1980s if auto executives don’t learn from their mistakes. n
Residents in Kenova, West Virginia have been complaining for more than a decade that chemical emissions from Ashland’s refinery in neighboring Catlettsburg, Kentucky has damaged residents’ health and property. Hundreds of area residents have sued Ashland, and more than 700 of those cases have been settled. Multinational Monitor has also learned that after years of investigation, State of Kentucky environmental officials are about to take action against the company.
The C& EN reporter, Wilbert Lepkowski, had been investigating the story for more than a year. He was informed in November 1994 by his editor that the story would not run. "To continue work on the article would not be in the long-term interest of the magazine," says C& EN editor Michael Heylin. Heylin says that he was "not happy with the incident."
Ashland Oil officials say that Lepkowski told them that he was planning on comparing the situation at the Catlettsburg refinery to the 1984 Bhopal disaster, in which more than 2,000 people were killed when methyl isocyanate gas leaked from a Union Carbide chemical facility in Bhopal, India. Lepkowski covered the Bhopal disaster for the magazine.
"The idea was never to compare it to Bhopal," Lepkowski says. "Ashland continues to misrepresent me. I told them over and over that the whole point of the piece was to explain the history of the situation from all sides."
Ashland’s Lampe defended the company’s actions. "We are members of the American Chemical Society," Lampe says. "This magazine is the press of our society. Our response was totally and entirely appropriate, especially when the charges are unfounded and ludicrous."
Diane Bady, director of the Ohio Valley Environmental Coalition, says that she worked with Lepkowski for over a year on the story. "Ashland managers are corporate bullies," Bady says. "They fight behind the scenes to make it impossible for reporters and regulators to do their jobs."
The EPA’s action followed an investigation earlier this year by Greenpeace and the South African group, Earthlife Africa, which revealed that Borden shipped thousands of barrels of mercury-laden wastes to South Africa in 1986 and from 1991 to 1993. The Greenpeace/Earthlife Africa investigation led Borden to recall a shipment of waste en route to South Africa in February 1994 and to stop all further waste shipments. The waste is stored at the Thor Chemicals mercury recycling plant in Cato Ridge, South Africa. Three Thor managers were arrested this year and charged with culpable homicide over the death of a worker from mercury poisoning. Twenty-eight other workers are suffering from various forms of mercury poisoning.
"Environmental pollution does not stop at the U.S. borders, and we will use all of our enforcement authorities against those who engage in the illegal international hazardous waste trade," says EPA Administrator Carol Browner.
Borden claims it is being sued by the EPA because it relied on the state of Louisiana’s determination of hazardous waste, and that the EPA "redefined" hazardous waste to include the Borden’s mercury waste. "We are being sued because we relied in good faith on the government’s definition of hazardous waste in effect at the time we took action," says Borden Vice President and General Manager Wayne Leonard, who vowed to "vigorously defend the action."
While Greenpeace welcomed the EPA suit, it said that the U.S. government continues to block international agreements prohibiting the international waste trade and that waste exports continue to flow with the U.S. government’s complicity. "The United States remains the only major industrialized government not to have agreed to a ban on hazardous waste shipments to the less industrialized world," says Greenpeace activist Kenny Bruno. "Until the United States prohibits hazardous waste exports, it will continue to send a mixed message to U.S. industry."
The case against AEBI grew out of criminal charges brought against two bank directors working in Beverly Hills, California, who were convicted of money laundering and bank fraud charges in June 1994 in a Brownsville, Texas federal court. Directors Antonio Giraldi and Maria Lourdes Reategui were found to have participated in laundering approximately $33 million for a Mexican drug organization by moving funds through American Express accounts controlled by holding companies created in the Cayman Islands .
To obtain the settlement, federal officials agreed to forego a criminal indictment of AEBI. "We decided that the criminal activity was not pervasive through the entire company," says Assistant U.S. Attorney David Novak. "It was limited to one branch office." In addition, Novak says, a criminal money-laundering conviction would have resulted in the "corporate death sentence." "If they were convicted, they would face losing their charter," he says.
"Under U.S. law, a corporation can be held responsible for acts of its employees," says Steven D. Goldstein, AEBI’s chair, president and chief executive officer. "We therefore made the determination that settling this matter was in the best interests of AEBI."
- Russell Mokhiber
Washington Lawyers Committee
for Civil Rights and Urban Affairs
1300 19th Street, NW, Suite 500
Washington, DC 20036
for Hazardous Waste
P.O. Box 6806
Falls Church, VA 22040
Government Accountability Project
810 1st Street, NE, Suite 630
Washington, DC 20002
United Electrical, Radio
and Machine Workers of America
2400 Oliver Building
535 Smithfield Street
Pittsburgh, PA 15222
Center for Auto Safety
2001 S Street, NW, Suite 410
Washington, DC 20009
The Pure Food Campaign
1130 17th Street, NW, Suite 300
Washington, DC 20036
Press for Change
P.O. Box 230
Bayonne, NJ 07002
1436 U Street, NW
Washington, DC 20009
256 Hanover Street
Boston, Massachusetts 02113
Rainforest Action Network
450 Sansome Street, Suite 700
San Francisco, CA 94111
Public Citizen Health
2000 P Street, N.W., 7th Floor
Washington, DC 20036
International Rivers Network
1847 Berkeley Way
Berkeley, CA 94703
Canadian Investor Protection Fund
South Tower, Royal Bank Plaza
200 Bay Street, Suite 2400
Toronto, ON M5J 2J4
Taxpayer Assets Project
P.O. Box 19367
Washington, DC 20036
203 East Main Street
Spartanburg, SC 29319
31355 Oak Crest Drive
Westlake Village, California 91361
3135 Easton Turnpike
Fairfield, CT 06431
3044 West Grand Boulevard
Detroit, MI 48202
800 North Lindbergh Boulevard
St. Louis, MO 63167
One Bowerman Drive
Beaverton, OR 97005
700 Anderson Hill Road
Purchase, New York 10577
Philip Morris Companies
120 Park Avenue
New York, NY 10017
P.O. Box 7600
Los Angeles, CA 90051
7000 Portage Road
Kalamazoo, MI 49001
Fraud: Bringing Light to the
Dark Side of Business
By W. Steve Albrecht et. al.
New York: Irwin, 1994
Corporate Crime Reporter
P.O. Box 18384
Washington, DC 20036
Corporate Crime and Violence
By Russell Mokhiber
Sierra Club Books, 1988
World Class Business: A Guide to
the 100 Most Powerful Corporations
By Philip Mattera
Henry Holt and Company, 1994
Just Do It
By Donald Katz
New York: Random House, 1994
INFACT Brings GE to Light
New York: INFACT, 1988
The Cola Wars
By J.C. Louis and Harvey Z. Yazijian
New York: Everest House, 1980
Washington, Wall Street, and the Frustration of American Politics
By Kevin Phillips
Boston: Little, Brown and Company, 1994
Boiling Point: Democrats,
Republicans and the Decline
of Middle-Class Prosperity
By Kevin Phillips
New York: Random House, 1993
Mortgaging the Earth:
The World Bank, Environmental
Impoverishment, and the Crisis
By Bruce Rich
Boston: Beacon Press, 1994
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