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Politically Connected Corporate Crime

The U.S. Justice Department says that over the past three years, it has brought nearly 10,000 fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants,  but not one of those cases was brought against a major Wall Street bank or high-level Wall Street executive even though fraud played a major role in the financial meltdown. This is well known in the United States and. it has been well documented; most recently by PBS in its Frontline program, “The Untouchables”, and again in December of 2011 on 60 Minutes in its program, “ Prosecuting Wall Street”.

Could it be that politically connected corporations commit  more crime than other companies, but because of their political connections they are able to dodge the police and law enforcement? There is some evidence that the answer may be yes — at least in China.

Ray Fisman is a professor at the Columbia Business School and Yongxiang Wang is an assistant professor of finance and economics at the USC Marshall School of Business. They have published a paper in the “Harvard Business Review”  titled,  “The Unsafe Side of Chinese Crony Capitalism”.

Fisman and Wang set out to test the claim that  many companies in China use their political relationships to safely circumvent  oversight and regulations. Their research found “a strong link between escaping punishment for worker deaths from accidents and the political connectedness of corporate executives.” “We studied all publicly traded Chinese companies in safety-regulated industries, including petroleum and natural gas extraction, mining, chemicals manufacture, and construction—a total of 276 firms,” they write.  “We added up the annual fatalities in each firm from 2008 to 2011, using company-reported statistics, government data, and press reports. After examining the employment histories of the firms’ top (C-suite-equivalent) leaders, we defined a company as “connected” if at least one executive previously held a high-level government post.  “Our results showed that on average, the rate of worker deaths is five times greater at connected companies than at similar companies that lack political connections.”

Fisman and Wang went on to report, “The finding that connected companies have much worse records was remarkably consistent from year to year.  “Moreover, deaths per 10,000 workers rose by almost 10, on average, during the year following the arrival of a connected executive at a previously unconnected firm, and fell by 6.4 during the year following a connected executive’s departure. To investigate whether our results were skewed by underreporting, we narrowed our focus to include only major accidents, or ones that caused three or more deaths — events that would be very hard, if not impossible, to shield from discovery. The same pattern prevailed, more deaths.”


Edward Lehman 雷曼法学博士
Managing Director 董事长

LEHMAN, LEE & XU China Lawyers
Founder of LehmanBrown

Lehman, Lee & Xu is a top-tier Chinese law firm specializing in corporate, commercial, intellectual property, and labor and employment matters. For further information on any issue discussed in this edition of China Business Crime In The News or for all other enquiries, please e-mail us at mail@lehmanlaw.com or visit our website at www.lehmanlaw.com


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