The Economist posits a question:

WHO runs the world’s most lucrative shakedown operation?

Yes, that’s right. Of course it’s the United States of America, our beloved government doing what it has to do to regulate business so that it meets the great many rules that we demand of it.  Well, perhaps not exactly we, but rather the fact is that a lot of people really hate big business. Liars, cheaters, greedy scum. It needs to be regulated, because how else can we protect the spotted salamander?

Fair enough.  Let’s forget the flip side, that it provides the goods and services we rely upon to live, because those iPhones won’t make themselves, and gives us the jobs that allow us to buy the next shiny thing.  If they don’t make a profit, they can’t continue to exist, even if that smacks of greed.

But the regulatory system is backed up by criminal penalties, even though the regulation has all the attributes of civil dispute, where the issue is one of monetary penalties should a corporation not meet a baby prosecutor’s expectation of how business ought to happen.

Until just over a century ago, the idea that a company could be a criminal was alien to American law. The prevailing assumption was, as Edward Thurlow, an 18th-century Lord Chancellor of England, had put it, that corporations had neither bodies to be punished nor souls to be condemned, and thus were incapable of being “guilty”. But a case against a railway in 1909, for disobeying price controls, established the principle that companies were responsible for their employees’ actions, and America now has several hundred thousand rules that carry some form of criminal penalty.

Ah yes, the employees.  This is where the wedge is shoved into the hearts of corporations, with prime corporate officers presumed to know that the mail room guy in Boise was wearing butt ugly Bruno Magli shoes, too expensive for his meager salary, and so he should have realized he was feeding prospectuses to hedge fund managers for their inside trades.  Of course, the Assistant United States Attorney leveling this damning accusation sits there in Louboutins, but that’s different. Hers are cute.

So the corporation pays or the COO gets thrown under the bus.  Or both.  As corporate officers reluctantly learn, boards of directors don’t love them as much as they think when the government does a full court press.

The best thing would be for at least some of these cases to go to proper trial: then a few of the facts would spill out. That is hardly in the interests of the regulators or their managerial prey, but shareholders at least should push for that. Two senators, Elizabeth Warren and Tom Coburn, have put forward a bill to make the terms of such settlements public, which would be a start. Prosecutors and regulators should also be required to publish the reasons why, given the gravity of their initial accusations, they did not take the matter all the way to court.

For business, it’s just a business decision.  How much will it cost them to defend, recognizing that there is never an assurance of prevailing, as compared with the cost of buying off the mob.  Added to this mix, though ignored in the Economist, is that most corporations retain Biglaw to advise them, and most “white collar specialists” in Biglaw came straight from the Department of Justice, and after tens of millions of dollars of investigation, reaches the required conclusion: You must capitulate.

So what if they have a great defense, did nothing wrong, or face absurd regulations?  Settlements bring finality and certainty; you know what it costs.  What about all the heinous claims of the DoJ at the fancy press conference announcing how MegaCorp eats babies?  For a billion, the government will be happy to let them eat any damn thing they want.

The Economist proposed two major reforms necessary to bring some modicum of sanity to the prosecution of business:

In the longer term, two changes are needed to the legal system. The first is a much clearer division between the civil and criminal law when it comes to companies. Most cases of corporate malfeasance are [sic] to do with money and belong in civil courts. If in the course of those cases it emerges that individual managers have broken the criminal law, they can be charged.

The second is a severe pruning of the legal system. When America was founded, there were only three specified federal crimes—treason, counterfeiting and piracy. Now there are too many to count. In the most recent estimate, in the early 1990s, a law professor reckoned there were perhaps 300,000 regulatory statutes carrying criminal penalties—a number that can only have grown since then. For financial firms especially, there are now so many laws, and they are so complex (witness the thousands of pages of new rules resulting from the Dodd-Frank reforms), that enforcing them is becoming discretionary.

While both are well-grounded, and apply with similar force to all rather than just business, the nation has become dependent on the cashflow from these investigations/prosecutions.  Raise a claim and it’s money in the bank.  The only question is how much, and that depends on whether the corporation can pass it through to the consumer or customer, because no corporation can agree to a fine that will bankrupt it. There would be no point.

If you connect the dots, this becomes a secret user tax on the consumer, since the cost of these settlements, which go into government coffers to fund our favorite programs, is part of why those shiny toys cost as much as they do.

But how will these changes improve matters?  With the number of regulations out of control, there is no corporation that is immune from accusation, whether real or imagined. Hell, there isn’t a person in American who isn’t a criminal, right Harvey?  This makes every business a sitting duck for government, an ATM to be tapped at will.

And if the matter was civil rather than criminal, with massive threats of criminal sanctions rather than civil damages for actual harms suffered, perhaps corporations would have the guts to challenge the government, go to trial, and fight once in a while.  This would not only serve to make the government’s claims transparent, but would also put a check on the wanton use of threats of prosecution to shake down business.  Make the government prove its accusations.

And there remains one aside that few seem to recognize or care much about in this mix, that between the government and corporations, no one gives a hoot about the employees thrown under the bus of criminal liability in the name of corporate survival.

There is usually a sacrificial lamb on the altar of these secret settlements, to blame for all the claimed evils, and he or she is a person just like you.  It’s not just the corporations who suffer for the government’s lucre, and the employee cut loose to take the rap is no less deserving than any other human being of not getting caught up in this morass.  So if you can’t feel for the corporations, at least consider the poor shmuck who was set adrift so you can enjoy your shiny toy.

H/T Dan Hull, What about Clients?