April 09, 2007

Does non-profit mean non-governance? Evidence from the fat, rich and naive business sector

I've previously blogged on how the non-profit sector is happy hunting grounds for scams, fraud, incentives deals and all sorts of horrible deals. This caused outrage by those who believe that non-profits are somehow protected by their basic and honest goodness. Actually, they are fat, happy and ripe for fraud.

The basic conditions are these:

  • lots of money
  • lots of people from "I want to do good" background
  • little of the normal governance is necessary

Examples abound, if you know how to look. Coming from a background of reading the scams and frauds that rip apart the commercial sector, seeing it in the non-profit sector is easy, because of the super-fertile conditions mentioned above.

Here's one. In New York state in the US of A, the schools have been found taking incentives to prefer one lender over another for student loans.

[State Attorney-General] Cuomo has sent letters to and requested documents from more than a hundred schools for information about any financial incentives the schools or their administrators may have derived from doing business with certain lenders, such a gifts, junkets, and awards of stock.

A common practice exposed by Cuomo is a revenue-sharing agreement, whereby a lender pays back a school a fixed percentage of the net value loans steered its way. Lenders particularly benefit when schools place them on a short list of “preferred” lenders, since 3,200 firms nationwide are competing for market share in the $85 billion a year business.

Here's an inside tip that I picked up on my close observance of the mutual funds scandal, also brought by then NY-AG Elliot Spitzer (now Governor, an easy pick as he brought in $1.5bn in fines). If the Attorney-General writes those letters, he already has the evidence. So we can assume, for the working purposes of a learning exercise, that this is in fact what is happening.

There's lots of money ($85Bn). The money comes from somewhere. It can be used in small incentives to steer the major part in certain directions.

To narrow the options, most schools publish lists of preferred lenders for both government and private loans. They typically feature half a dozen lenders, but they might have only one. Students should always ask if the school is getting any type of payment or service from lenders on the list.

To get a loan, schools must certify that you are qualified. By law, schools can't refuse to certify a loan, nor can they cause "unreasonable delays," because you choose a nonpreferred lender. That said, many schools strongly discourage students from choosing a nonpreferred lender.


The University of North Carolina at Chapel Hill tells students on a form that if they choose a lender other than the school's sole preferred lender for Stafford loans, "there will be a six-week delay in the processing of your loan application" because it must be processed manually.

How do we address this? If we are a non-profit, then we can do these things:

  • pick a very solid mission.
  • build an environment that supports that mission, down to the cellular level.
  • create an open disclosure policy which allows others to help us pick up drift.
  • especially, create a solid framework for all "deals."
  • put together a team that knows governance.

It's not so exceptional. Some schools got it:

Thirty-one other schools joined Penn and NYU in adopting a code of conduct that prohibits revenue-sharing with lenders, requires schools to disclose why they chose preferred lenders, and bans financial aid officers and other school officials from receiving more than nominal gifts from lenders.

Clues in bold. How many has your big fat, rich open source non-profit got? I know one that has all of the first list, and has none of the second.

Posted by iang at April 9, 2007 07:19 AM | TrackBack

The one thing that is not revealed is the deals universities cut with credit card issuers to solicite the students and offer incentives. Universities and other large non-profits have benefited from seller their users as herd at auction. In the end any affiliation can be and will be exploited. Looking at AARP an association for the elderly in the US show reveal some rich scams and abuse of priviledge. The oddity is the priviledge is extended to the institution by the user perhaps just like organized relegion. So human relations have fallen to an all time low. I believe the last advance we experienced is removal of slavery as a legal form of ownership. The advances seems slow and troubling and tend to slip back into derivative forms of abuse akin to slavery but never as vulgar. The Chinese have banned the sale of organs for profit but the practice still continues. Its all the win loose ideology the proliferates the Western mind how can anyone but me win since it is a commodity. In the end the dignity that should be part of human interaction is removed, thus reducing us to some ones idea of a commodity in some venue. The ability of capable minded adults to devise a means of screwing other capable mind adults is the better mouse trap concept of consumer economics, the only remaining hurdle is to stop seeing fellow humans as prey animals to be tracked across the open field for the butchering. It is simple people have to loose their taste for blood and forsake the Vampire way of life. Draining the blood of innocent victims is unforgivable.

Posted by: Jimbo at April 8, 2007 07:00 PM

ICANN May Go Private

Nancy Gohring, IDG News Service Sat Apr 7, 2:00 PM ET

The Internet Corporation for Assigned Names and Numbers is considering a change in the way Internet's governing body is organized that could allow it to skirt some potential legal issues.

In late March, a committee that was formed to make recommendations to ICANN related to certain strategic issues released the President's Strategy Committee Report with its findings. The committee recommends that ICANN and relevant stakeholders consider the advantages of "moving ICANN's legal identity to that of a private international organization based in the U.S."

As the committee sees it, that change would offer the organization immunities to limit liabilities.

Some onlookers are skeptical of the idea. "ICANN's new President's Strategy Committee Report makes public for the first time what insiders have been muttering about for almost a year: ICANN has a great new idea for avoiding all accountability," Michael Froomkin, a professor specializing in Internet and administrative law at the University of Miami School of Law, wrote on ICANNWatch.org, a Web site he helped found.

If ICANN were to go the route of re-classifying itself as an independent international organization, it would be on par with groups like the
International Olympic Committee and Fédération Internationale de Football Association (FIFA), the international soccer association. That model hasn't necessarily worked perfectly, he said. "Not surprisingly, the lack of accountability at the IOC and FIFA created a climate for scandal and speculation," he wrote.

Also, the U.S. is unlikely to agree to such a change, which would essentially shield ICANN from any liability or judicial supervision, he wrote.

If ICANN does move forward with the plan, it should make sure to establish full accountability and review mechanisms, including a process for using international arbitration panels, the committee wrote. It should also consider incorporating relevant California or U.S. federal law into its arbitration process, the committee said.

The proposal comes after a decision late last year to extend U.S. government oversight of ICANN for three more years. That decision drew praise from onlookers eager to ensure that a transition to independence is smooth for the organization and criticism from those pushing for ICANN to be truly international, without the influence of any one government.

Posted by: ICANN discovers the barbs of governance... at April 9, 2007 06:43 PM

Stiglitz Hits Multinational Corporate Power
21 Corporate Crime Reporter 15, April 5, 2007

If multinational corporations do so much good in the world, then how come people across the globe hate them so much?

That’s the question Nobel Prize winning economist and Columbia University Professor Joseph Stiglitz sought to address last week before the American Society of International Law’s annual convention in Washington, D.C.

And the answer?

Well, for one, corporations take advantage of limited liability.

“Without limited liability, it would be hard to have a modern capitalist economy,” Stiglitz told the gathering. “But corporations take advantage of limited liability. Mining companies take out natural resources and leave behind an enormous environmental mess. When it comes time to clean up the mess, the company says – I’m sorry we are bankrupt. We have nothing. We have already paid out all of the revenues to all of the shareholders. The company goes bankrupt and the community is left to pick up the cost of the cleanup.”

Then there is their massive economic power the corporations use to get favorable legislation by passing around campaign contributions.

“It’s a particular American form of corruption with a very corrosive effect on democratic processes particularly in societies where democratic institutions are just being created,” Stiglitz said.

That would be legalized bribery.

Then there are the illegalities and crimes.

They pay bribes overseas.

In the United States, cigarette companies knew their products were deadly, lied about it, and marketed them anyway.

The oil companies engage in massive cheating in hard to detect ways, Stiglitz said.

“To catch this cheating requires extra-ordinarily sophisticated detection, beyond the capability of most developing countries,” Stiglitz said. “Companies know they are going against very sophisticated institutions in the United States. What must be happening in the developing countries where there are clearly no such institutions?”

They’re getting reamed.

The power of the multinationals is enormous, Stiglitz said.

Revenues of General Motors are more than the GDP of 148 countries.

Wal-Mart’s revenue is larger than the combined GDP of all sub-saharan Africa.

“And they use that power to get special treatment,” he said. “They try sometimes to make sure that environmental and health regulations are not enforced. They sometimes get legislation and preferences over domestic businesses.”

“Sometimes this special treatment is above board. They will say – passage of this legislation is necessary for us to come to your country. And the fact that they threaten to leave if they aren’t given what they want is very powerful. But sometimes it’s based on corruption. And developing countries are particularly susceptible to corruption.”

“The mandate of companies is mostly to maximize profits,” Stiglitz said. “Maximizing profits means, for example, getting the oil at the cheapest price possible. It’s a lot cheaper to bribe somebody whose annual income is $10,000 than to pay full market price. And many of the multinational companies have given in to that temptation.”

Stiglitz pointed out that while much of the world now lives under anti-bribery laws, there is very little enforcement of these provisions.

As for secret bank accounts, the U.S. has been recalcitrant.

There was an OECD initiative to restrict secret bank accounts, and the U.S. vetoed it in August 2001, Stiglitz said.

“Then after September 2001, we recognized that these secret bank accounts were being used to finance terrorists,” he explained. “We have since then have been able to show that we can shut down those secret bank accounts. But we have chosen only to do it for terrorists. Our view is that using it for corruption or other purposes – that’s fine.”

Stiglitz said that bankers in tax havens like the Cayman Islands like to invite him to speak to them.

“For some reason, some bankers in these tax havens like to invite me to give talks,” he said. “ They feel better having me lecture them about how they are sinners. They feel that’s a way of doing penance for their sins. One time, after I gave this lecture about how bad secret bank accounts are, how they facilitate drug dealing, money laundering and corruption, two or three people in the audience came up to me to talk. And they said – you know, you have this wrong. We don’t do that kind of secret bank accounts. We don’t do corruption, money laundering and drugs. We just do tax avoidance.”

“And I asked – how do you know?”

“And they said – we asked, and they told us.”

Stiglitz said that it is “hard to think of a successful American economy with only state laws and no way of dealing with cross border disputes.”

On the international level, this leads to the problem of enforcement of judgments beyond borders.

Think of television scene of the sheriff chasing the bandit. The sheriff comes up to the border and stops. The bandit crosses into another state.

International corporate law is like that in a lot of ways.

“Companies know they can escape across the border,” Stiglitz said.

Case in point – Union Carbide India.

“American executives who were responsible for the 1983 Bhopal disaster knew they could escape to the United States and not face prosecution for crimes which they committed in Bhopal,” he said. “Thousands of people died in Bhopal and yet no one is held accountable for this disaster.”

On the international level, the gap in international law is being filled with investment agreements.

The problem in crafting these agreements is the disproportionate power of the multinationals, Stiglitz said.

As a result, these investment agreements sometimes provide foreign corporations with more rights than domestic investors.

And since there is a non-democratic non-transparent negotiation process for some of these agreements, they get what an open, democratic political process would never have granted.

Stiglitz was at the White House when the North American Free Trade Agreement (NAFTA) was being drafted.

“Chapter 11 of NAFTA was described as a provision that provided investor protection,” he explained. “But there was a lot of controversy about whether or not there was a provision in NAFTA that was a regulatory takings provision that would provide for compensation for changes in regulation that might have an adverse effect on value. This was an issue that the White House felt extremely strongly about. There were proposals from the Congress on this – conservative anti-environmentalists in the Congress wanted a regulatory takings provision for the United States. If you had this, it would make it very difficult, too costly to have strong environmental regulations. And that was why the anti-environmentalists wanted this provision. The White House mounted a strong and vigorous attack against the regulatory takings provision and succeeded. And had anybody thought that there was a provision in NAFTA that opened up the possibility of a regulatory takings provision, it would have been opposed by almost everyone in the White House. It was something that people felt very strongly about. There was a broad consensus about this.”

“Not once did anyone say that there was a provision like this in NAFTA,” Stiglitz explained. “It was never discussed. It was only after it passed that the potential consequences of this agreement became clear. Chapter 11 included a regulatory takings provision that allowed investors to sue states, with damages paid by the national governments. The question was – if U.S. signed on to an agreement without knowing what it was agreeing to, what did this say about other countries?”

Stiglitz called for the reform of the “intolerable” arbitration system set up by these investment agreements.

He called for the creation of an International Court of Commercial Claims and the extension of the Alien Tort Claims Act.

“The current system is unfair to developing countries in the short run,” he concluded. “But it is worse in the long run – because it undermines the rule of law. Right now, the rule of law is not seen to promote efficiency or to protect those who might not be able to fend for themselves. No, right now the rule of law is seen as a game by which one party takes advantage of another.”

Corporate Crime Reporter
1209 National Press Bldg.
Washington, D.C. 20045

Posted by: Stiglitz says Multinationals are worse... at April 12, 2007 10:00 AM
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