By William K Black
The financial scandal and the Great Recession that it causedhave understandably captured the bulk of our attention, but we must not losesight of the fact that “control frauds” continue to maim and kill enormousnumbers of people and damage the environment and society throughout theworld. Several examples of these fraudshave led to recent press reports. Iwrite to point out that control fraud is the common feature of thesescandals. I address four recentmanifestations of control fraud: theFrench manufacturer of defective silicone breast implants, the death of manyFillipinoes in floods made lethal by illegal deforestation, the deaths anddevastation caused by illegal seizure and exploitation of mines in the Congo,and the scrap metal dealers who put the profit in the theft of metals in theUK. This first column explains theFrench breast implant fraud.
Varietiesof Control Fraud
Control frauds occur when the persons controlling aseemingly legitimate entity use it as a “weapon” to defraud. Such frauds occur in the private, NGO, andpublic sector. I write primarily aboutaccounting control frauds because accounting is the “weapon of choice” forfinancial control frauds. (Liar’s loanswere the best ammunition, and subprime liar’s loans were the equivalent ofteflon-coated bullets designed to pierce protective armor.) Shareholders and creditors are the primaryintended victims of accounting control fraud, which creates record, but fakeprofits. Other forms of control fraudcreate real profits. Anti-purchasercontrol frauds target the customer and involve deception as to the qualityand/or quantity of the product. Anti-public control frauds target the public. Illegal logging, the illegal seizure andexploitation of mines, and purchasing goods one knows are likely to be stolenare examples of frauds designed to harm primarily the public.
TheFrench Manufacturer of Defective Breast Implants
Poly Implant Prothese (PIP) was a French manufacturer ofsaline and silicone breast implants. TheFDA found severe problems with PIP’s production of saline implants a decade agoand alerted PIP and its French regulatory counterpart to the problems in 2000. The FDA described the saline implants as“adulterated” due to eleven flaws in its manufacturing processes.
Learning about Jean-Claude Mas, PIP’s CEO, should serve as anecessary caution. Far too many peoplecannot believe that people who run corporations can be “real” criminals. CEOs can be despicable, and their approach totheir customers can be loathsome. MasCEO knowingly put the health of hundreds of thousands of women at risk.
“Haddad[Mas’ lawyer] said that Mas freely admits using unapproved silicone gel, butremains adamant it is safe.
“PIP knew it wasn’t in compliance, but it wasn’t a toxic product,” the lawyersaid, adding it “had not been proven” the implants were any more likely toleak.
“The fact that it’s an irritant (when ruptured) is the same for all siliconegels….”
PIPused two types of silicone in its implants, Haddad said. One of them was anapproved gel made by American firm Nusil, but it also used an “identical”homemade gel that was five times cheaper.
According to PIP’s 2010 bankruptcy filing, it had exported 84 percent of itsannual production of 100,000 implants.”
But the substitute gel was not “identical” and whilemedical-grade silicone is an “irritant” when an implant ruptures thenon-medical gel posed a substantially greater risk. PIP’s production quality problems continued,so PIP’s poor quality implants were also more likely to leak. Indeed, PIP began putting the unlawfulsilicone in its products in 2001, shortly after it received the FDA warningabout its unsafe production methods (see here).
TheoclassicalEconomists Assume that Greater Consumer Choice is Unambiguously Good
Why would PIP continue to purchase some medical-gradesilicone at five times the price?
“The tycoon at the heart of the breast implantsscandal that has affected hundreds of thousands of women has admitted hiscompany deliberately used inferior silicone gel.
The owner of bankrupt company Poly Implant Prothese(PIP) Jean-Claude Mas revealed that PIP sold protheses with industrial-gradesilicone that had not been approved by health authorities to be sold atdiscounted prices.
But wealthier clients were sold implants withhigh-quality gel, The Times newspaper reported.
Mr Mas, 72, explained through his lawyer, YvesHaddad, that the reason behind the product was that his company had an’economic objective’ and that his management aimed to get ‘the best cost’.
He also admitted that the industrial-grade siliconeimplants, which could cause health problems if they burst or leak, ‘did notformally receive approval’ and regulations were violated.
France’s medical safety regulators AFSSAPS werenever asked to inspect or approve the products.
Mr. Mas said there was a basic and a high-endversion of the implant, but that the cheaper version – which was ‘five timescheaper’ – was just as effective as the costlier version.”
PIP did not inform its poorer customers that it was illegally selling theminserts made with cheaper, unapproved industrial-grade silicone (see here).
PIP also did not inform its customers that “the casingaround the filling was also faulty and prone to rupture or leakage’” (see here).
Interpol’sImplicit View of the Seriousness of various Crimes
There were a flurry of press reports that Interpol had issued an arrestrequest for Mas, but it turned out that Interpol’s action was unrelated to Mas’placing the health of hundreds of thousands of women at risk through fraud. (see here)
“International police agency Interpol has beenissued a “red notice” for Mas, however it’s for an unrelated case — he wasarrested in June 2010 for drunk driving, but left the country and did not showup for a scheduled court date.”
That Interpol incident illustrates brilliantly thedifference in societal reactions to different varieties of crimes, but it alsooffers some hope. Drunk driving is aserious crime that often maims and kills. An individual impaired driver of a car can put dozens of lives atrisk. A fraudulent CEO running a medicalequipment company can put hundreds of thousands of lives at risk. Only a few decades ago it was rare for lawenforcement to take drunk driving seriously, particularly if the driver waselite. A social movement, MothersAgainst Drunk Driving (MADD), worked for many years to get society and lawenforcement to think of drunk driving as grave crime. We need a similar social movement to getsociety and law enforcement to see control fraud as a grave crime worthy of anInterpol “red notice.”
What separates the most destructive fraudulent CEOs fromtheir lesser counterparts is audacity. The French (naturally) have a saying that captures the conceptperfectly. “L’audace, encore l’audace,toujours l’audace” (audacity, more audacity, always audacity). Mas is off the scale when it comes toaudacity. Mas exemplifies the Spanishmeaning of his name (“more”). No soonerhad he (for the second time) been found to have endangered his customers, thanhe was planning to go back into the business of producing and selling breastimplants. (see here)
“The French head of the company at the centre of theinternational breast implant scare was employed by a second firm making [breastimplants] set up by two of his children.
The plan described Mas, 72, as a “creativegenius” and says its collaborators have “30 years of experience inthe field of quality, research and development, production andcommercialisation of breast implants”.
It stated its aim was to produce 400 silicone gelimplants every day at the former PIP production site in the south-east ofFrance, to be sold to “the European, South American and Chinesemarket”.”
It takes a special kind of depravity to describe oneself asa “creative genius” after a life of defrauding one’s customers through meansthat put their health at undue risk. Iwrote an earlier column discussing what ring of hell Dante would make thefrauds that drove the financial crisis reside in if he were able to write amodern Divine Comedy. After a career of preying on women, Masshould pray fervently that there is no physical or spiritual hell.