Honda receives record fine, but the real story is truly frightening

The big news is that Honda paid a record fine to the federal government. The stories link this $70 million fine to failure to report “more than 1700 deaths and injuries” in its vehicles. Are you kidding me? This car  company killed or injured 1700 people and no one knew about it? You would think this would be the story of the decade.

The truth is, this is not at all the truth. And underlying this little reported story is the real story: a story of huge new crisis risk facing companies doing business in the United States. The risk is the unwarranted criminalization of business for the purpose of raising government revenue.

If you are a business owner or executive of almost any size, please look carefully at this chart developed from information provided by the Economist:

Economist chart fed fines.001

 

 

 

 

 

 

 

 

That hockey stick growth is the rise in government fines against US companies. The cover of the August 30 edition of the Economist featured “the criminalization of American business.”

It so happened that at about the same time I was working with a client on exactly one of these crises. I can’t reveal details because of the threats made by federal officials against my client. But believe me when I tell you that they paid a huge fine for doing absolutely nothing wrong–a claim supported by other government officials involved in the case. Then the agency fining them aggressively promoted a press release claiming the fine proved their guilt when the settlement was negotiated under threat. If the company didn’t agree to the settlement they would face a court case that if they lost would have destroyed them. When the company tried to set the record straight in the media, explaining it was a settlement done for business reasons, the agency official threatened them with possible jail time.

The Economist article points out the billions in fines against banks like BNP Paribas, Credit Suisse, Bank of America, Goldman Sachs, JP Morgan Chase and others.

Add to this the $1.2 billion fine against Toyota related to the safety recall. You may remember that the federal government (while a major investor in GM) famously said the only place you should drive your Toyota was to the repair shop. This was after a series of highly publicized accidents where the media accused the company of faulty electronic systems and slow recall. After NASA investigators got involved, all the accidents were shown to be driver error or faulty installation of mats–none related to the supposed Toyota problems. But, still, the federal government extorted $1.2 billion from the company. What for? Well, like almost all agreement as the Economist points out, the reasons were kept confidential as part of the settlement.

Why? Why is this happening?

If the dramatic increase cannot reasonably be attributed to a sharp increase in corporate misbehavior, then what? The head of the Department of Justice, Eric Holder, announced that the agency’s efforts resulted in over $8 billion in revenue for the US government against a cost of operating the agency of just $2.8 billion. That excellent return on investment was for 2013 and will be dwarfed by the much larger number for 2014. The Economist reports that the return on the False Claims Act enforcement net the Department a twenty to one return. State and local agencies who participated in settlements, such as Google’s settlement of $500 million for allowing internet users to advertise prescription drugs from Canada, have gone on spending sprees. It’s not surprising that Mark Rosekind says the Department of Transportation will seek to increase the maximum fine for violations or extortion such as this to $300 million. He needs to keep up with the massive amounts of money flowing into agencies like the Department of Justice and he can’t do that on paltry $70 million fines.

Is it any wonder that the Economist, which has endorsed President Obama in each of his presidential elections, called this administration the most anti-business in memory.

If you think this new risk of your own government turning against you unfairly and without justification, you should consider the “hot goods” case involving berry farmers.

In late July 2012 the Department of Labor investigated three blueberry farms in Oregon. Using a formula they established they decided the farmers were in violation of the fair labor law. Their formula showed the farm’s pickers picked more than the formula said they should so therefore they concluded the farm hired “ghost workers.” They had no proof other than the formula. To enforce the law, the Department invoked the “hot goods” provision and notified wholesalers that the fresh blueberries could not be processed. “Hot goods” allows the government to hold the product until the issue is resolved, but of course, when the product is highly perishable you could win the argument and lose the farm.  The Department offered a way out: agree they had violated the law, sign an order saying they would not contest the findings even if it proved they were innocent, and pay back wages and a large fine. Two farms ended up paying out more than $240,000 to get their blueberries back in time to avoid ruin.

But, despite the fact that the agreement said they could not fight it or appeal, the farmers did, and they won. The courts agreed that they were coerced into a settlement and agreement of wrongdoing by the Department of Labor and ordered the government to pay the money back. As of this writing, the government is still fighting the courts and refusing to pay. And as in the other cases, may be looking for ways to punish the farmers who had the temerity to challenge this extortion.

For complete details on this sad situation, read this.

Bad behavior by business owners and leaders needs to be punished. Laws and regulations need full compliance. Enforcement is a very important part of the accountability in our system. But, these actions by our government agencies cannot be included in justified enforcement. This is what happens when the government, feeling justified by a backlash against big government, resorts to bullying and extortion to raise funds and generate left wing applause. It represents one of the most significant, frustrating and frightening new crisis risks facing business in a long time.

2 thoughts on “Honda receives record fine, but the real story is truly frightening”

  1. Interesting. When I read this, I couldn’t help but wonder if this is related the fact that our taxation system in the US is increasingly regressive. So perhaps these fines are simply a form not of punishment, but of taxation. US Corporate tax rates are at historic lows. Maybe this is the natural and inevitable outflow of 35 years of supply-side policies. So the question becomes “would you prefer to pay up front, or pay after the fact?”

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