Ethics, Fraud, and the Rise of Environmental "Crime" in a Regulated World

Ethics, Fraud, and the Rise of Environmental “Crime” in a Regulated World

Altering emission control systems in diesel pick-up trucks is quite common. It does improve “performance” which is one reason people do it, although it is illegal. I have seen quite a few of these trucks “rolling coal,” as they call it. This is perhaps to be expected. However, the Volkswagon scandal was not expected and the many people who bought these vehicles with the feeling that they were buying a low emissions vehicle had been thoroughly deceived.

The lure of environmental crime is simply that it pays, if you don’t get caught. Once long ago, an oil & gas company that I worked for found out a service company collecting brine water from wells was dumping brine water to avoid paying to dispose it. The incident was immediately reported and contracting with the company was immediately discontinued even though it may have been just one employee and not a policy of the company. Better accounting of well water volumes and disposal tickets – a mandatory system to account for every bit of water – could have prevented such happenings. The conviction of Ohio man Ben Lupo in ordering the dumping of frack waste water directly into a river was a clear case of environmental crime where justice was served. The conviction of Massey Coal CEO Don Blankenship of ordering the expediting of coal production at the expense of the stated safety concerns of mine workers resulting in an explosion that killed 29 men is perhaps a less blatant and direct case but he was found guilty. Of course, many accidents in the form of spills, leaks, explosions, and fires are not the result of specific deliberate actions but they do happen. I have indirectly personally experienced illegal dumping of saltwater in oilfield operations. The well encountered flowing saltwater far above the zone of interest and it was filling the pits and would present disposal costs. The well ended up being a dry hole in the zone of interest. I was young and new at the time and not involved in any decision-making but when rig tool pusher came to me complaining that he was ordered him to dump saltwater in the creek/ditch outside the farmer’s field I did not know at the time the implications nor how illegal or damaging it could be. Later there was a big stink about it as all the plants and trees around the ditch were killed. As I heard years later the drilling company was blamed not the people that ordered the dumping. The company is no longer active to my knowledge.

There is of course a difference between deliberate actions that should be considered criminal, violations due to gross negligence and ignorance of the law, honest mistakes, and unforeseen accidents. These differences need to be distinguished properly by all parties.

Have Corporate Ethics Breaches Become Systemic?

Fraud at the corporate level is no small matter. Currently, the German authorities are investigating high-level management at Volkswagon to determine if there was a more widespread effort to deceive consumers and profit from such deception. The recent Wells Fargo scandal where as many as 2 million fake accounts were set up and people were charged fees for them, resulted in the firing of 5300 employees. This was blatant fraud and downright contemptible. With that many employees involved it is very surprising that basic human guilt for being unfair did not produce more whistleblowers. It was predatory lending in part that initiated the 2008 financial downturn that caused lots of people to lose lots of money in the stock market. Those cases involved employees in the financial industry being incentivized to make deals that automatically benefit themselves and the corporation while deceiving borrowers that they could meet the needs of the deal with their limited incomes. The Wells Fargo case also involved incentives (now rescinded) to make money from the new accounts. Somehow in some people’s minds the act of successfully cheating someone is considered shrewd business. Our billionaire President Trump has also been accused of shortchanging contractors and improperly leveraging but has not been found guilty of such practices. In corporate-employee relations we have coal companies and other businesses trying their best and often succeeding, to deny pensions to former employees and even to deny black lung benefits to coal miners. This is pathetic and wrong on a basic level. Greed is a powerful motivator. We all want to succeed but we clearly need more focus on business ethics so that cases like these do not occur in the future. Both the Wells Fargo and quite possibly the Volkswagon case involve the conspiracy of many people working together to commit blatantly fraudulent activity. A less clear case involves the ‘bid rigging’ of oil and gas leases that the late Aubrey McClendon and others have been accused. Since the going price of leases varies quite a bit with speculations of their possible value as opposed to their known value it can be argued that it is a way to counter the potentially catastrophic over-valuing of leases due to speculation and competition. Apparently, it was also not that uncommon in practice. While it may have been illegal in several respects one can argue that it was not immoral, or at least not blatantly so like the other cases mentioned.

The question arises as to what would compel so many people to collude in a fraudulent act. Greed comes to mind first but what makes people give into it? Is it the prevalent business model that providing value for shareholders is the sole goal of business as espoused by Milton Friedman and others? Is it the stress to meet the short-term corporate demands for growth and revenue seemingly enshrined in modern business models? If profit is over-emphasized as the sole goal of business then it would seem to some of us that the ability to enhance profit by defrauding has some incentive at the level of business philosophy. The Wells Fargo case is being examined in college business classes (my son is a business major) where it has been noted that one incentive may have been unreasonable profit goals set by upper management that influenced lower level employees to hatch the schemes to open up unauthorized accounts and charge fees to customers without their agreement. In many cases it is perhaps the ease of which one can get away with it. Company cultures are involved, including the integration of independent contractors into the culture of their clients. Compliance is very important these days and breaches are unacceptable. Oddly enough, it was recently announced that Volkswagon took over Toyota as the largest seller of cars in 2016. This is in spite of the whopping $16 billion in fines in the U.S. and on-going investigations into the fraud allegations at the highest level by German authorities. Apparently the Chinese are buying VWs like crazy. So, in a sense, with Volkswagon we have a company that may well have committed mass fraud possibly perpetrated at the highest levels of the company and yet due to their increase in sales will still come out relatively unscathed. This might eat a bit at our intuitive sense of justice. 

Another very recent case of ethics breach is the international bribery scheme perpetrated by employees of Rolls Royce where foreign companies and governments were paid off in order to award contracts. While it is true that in many countries of the world corruption in both business and government is rampant, this scheme was simple fraud, where excessive commissions to negotiators were hidden as "engineering fees" in multi-million dollar energy projects. The recent rollback by Trump of Obama's rule to disclose payments to foreign governments seems to hint that corruption is so systemic that those who avoid it are at a competitive disadvantage. This is a shame in terms of business ethics but it may be a reality hard to change in the near-term, unfortunately. Rolls Royce has been ordered to pay $800 million in fines so far.    

Hedge fund managers seek to gain what they call an ‘edge,’ which refers to information about the impending short-term profitability or unprofitability of the companies they are examining. In order to find these edges they employ observation, sometimes to excessive levels like spying on traffic at company warehouses, which is perfectly legal. There is what they call white edge, gray edge, and black edge – referring to the varying levels of fairness and legality. Black edge can overlap with ‘insider trading.’ However, many ways of getting edge are perfectly legal, thus white edge, and some are underhanded but still legal, thus gray edge. The excessive focus on short-term trading on the basis of impending short-term profitability or unprofitability, kind of defines the hedge fund universe. Traders get wealthy, very wealthy, making such bets. This is undoubtedly useful for them and their businesses but is it useful for society? Such betting is certainly a part of what led to the 2008 financial crisis that hurt many people and was bailed out by taxpayers. It is a huge stain on the whole financial industry. Some new regulations followed the fiasco but many at the highest levels of finance emerged relatively unscathed. Many think that is unfair. At least in the Well Fargo scandal many people were fired.

Self-Reporting and the Role of Regulators

Regulations can and do create opportunities for criminals. Such was the case in the EPA’s system of crediting biofuels producers as a few were found to have bilked the system. Another example is that of trucking firms cheating on emissions declarations in Germany by using electronic gadgets. They do this to avoid road fees in Germany. It was estimated that 20% of Eastern European trucks had suspicious emissions levels. Apparently, the gadgets fool the trucks’ on-board computers into thinking that they have used a diesel exhaust additive called AdBlue that reduces emissions. The additive is costly so they save money. If regs can be worked around they will be. This is sometimes understandable when it is done by poor or small-business people trying to save money but would seem more sinister when done by large profitable corporations.   

Accurate reporting of things like engine emissions, carbon emissions, methane emissions, and VOC emissions is a feature of 21^st century regulations and this often involves self-reporting where there is no one overseeing or auditing someone’s reports. Of course, it would be easy to compare reported emissions of comparable companies to highlight anomalies so there is perhaps some built-in suppression of under-reporting. Thus, companies could only under-report to a certain extent or to an extent that seems reasonable, unless they have demonstrably developed certain procedures and technologies that reduce emissions more than comparable companies.

Thus self-reporting, while not ideally accurate can be considered to be reasonably accurate. While environmentalists deride self-reporting, especially of things like spills, alternatives involving more inspections would be more costly and require more employees devoted to such activities. Over-inspection could also agitate relationships between industry and regulators. It seems to me there needs to be a balance sought in the relationship between industry and regulators where both are satisfied with both the requirements and how they are met. Cheaters upset that balance and to some extent so can individual regulators who express anti-industry sentiments. Both should adhere to scientific accuracy, fairness, and basic courtesy. I was on a well-site once where there was a mud pit leak, possibly enhanced by recent heavy rains and the leak made it to a stream not too far away unbeknownst to the well operator. An officer from the U.S. Fish and Wildlife Service appeared on location irate and threatening to arrest people. The leak was found and fixed and after that well the company began using steel tanks for mud to eliminate the potential for it to recur. On the other hand there is little doubt that some companies and their contractors do sweep things under the rug at times if they think the problem or spill is small or that they might be subject to penalties. Bad decisions are made as well that can lead to problems. The development of safety protocols and a strong EH&S culture is very important and in reality is a good hedge against problems rather than an impediment.

In the state of West Virginia, newly elected Democratic governor Jim Justice has complained about West Virginia DEP personnel being anti-industry and suggested that there job is to aid industry. He has even derided their appearance, suggesting that they look ‘unprofessional.’ I don’t know if any of this is true or not. I do know as an industry-insider that WVDEP inspectors used to have an attitude more cozy with industry and a reputation for taking bribes although that was a long time ago. The recent case of a water-testing company found to be faking test-results to be in favor of the coal industry is perhaps another blotch on the state’s industries. Justice happens to be a billionaire owner of a coal company (some would say a coal baron) taking a decisive approach to reforming a regulatory agency in a state where he owns a company it regulates. Apparently, he also owes millions in unpaid fines for thousands of violations. That can seem a little odd to some, perhaps even a conflict of interests. For sure it is fine to advocate for a more business-friendly regulatory agency but over-doing it can erode public trust which is in no one’s interest. 

Self-regulation and effective management is very important these days in the oil and gas industry since there is far more waste water generated in horizontal fracked wells. Waste water management failures should be documented and fixed. This requires regulation, including fines for violations and possible criminal penalties for deliberate dumping. 

Regulators are a check and balance to industries. That is their mandate. They should endeavor to be unbiased in either case, whether in favor or against industry. Pollution and emissions that can be better controlled but are not can be considered ‘industrial overreach.’ Both industry advocates and critics also have a responsibility to be less biased but that is less likely since their stances are by definition imbued with some bias. The political views of regulators are likely across the board, some pro-industry, some neutral, and some anti-industry. Their individual records and reputations should be scrutinized (but not over-scrutinized) a bit, but only to see if they have gone too far in their biases. They have a responsibility to be unbiased but they also have a right to their political views, if not overly extreme.  

             

The Unwise Push to Defund, Defang, or Even Abolish the EPA

Republican President Richard Nixon approved the creation of the EPA with strong bipartisan support. While some favor environmental protection to be exclusively the role of the states one can certainly argue that such a move would create an uneven playing field where different states have different rules. The move to abolish the EPA by some Republican lawmakers is sure to fail the country and has been accurately describe in my opinion as “profoundly ludicrous.” That such measures can even come up seem rather ridiculous. That is not to say every EPA rule is fair and useful. While duplicate rules and some overreach can be argued, it is unlikely that the American people would back such a measure and they well shouldn’t. The EPA is involved in much more than rule making. It is not uncommon for partisans on both sides to claim that regulators at both federal and state levels are too cozy with business interests or environmentalists’ interests.   

In another sense, one may say that new laws and regulations create new criminals. Over-regulation and overly complex regulation has been a complaint, particularly at the federal level. Myron Ebel, the noted climate change skeptic in charge of Trump’s EPA transition team, recently talked about what he called the ‘expertariat’ which apparently refers to over-reliance on scientific experts to inform policy. While he may have a point about there being dangers of translating science directly to policy, his argument seems weak. Anti-green advocate Steve Milloy talks about the specter of “Green Big Brother” and suggests our ways of life are being curbed by calls to conserve and reduce. There is a kind of resistance to what is often called ‘regulatory overreach.’ Certainly one can make the case that many industries are already regulated at the state level and much of federal regulation is duplicative. Basic disagreements arise from differing assessments of the level of risk and cost/benefit analyses are often imbued with high levels of subjectivity.

Trump has vowed to undo 75% of regulations but it is unclear how that could happen. While the volume of reading required to understand and interpret laws and statutes can be burdensome it is unlikely to be as much of an impediment as sometimes described. The word “abusive” has been used in several places to describe EPA overreach but in some places states are making rules not far off from EPA rules so that is quite debatable. Trump’s order to require the elimination of two regulations for every new one that is enacted, while acknowledging that regs can be overwhelming in both quantity and excessive detail (millions of pages), does nothing and is mostly symbolic nonsense.

Defunding otherwise limiting the EPA’s Enforcement Office & Compliance Assurance (OECA) has also been reported as a Trump administration goal. They may be planning to abolish the office as a standalone segment and combine it with individual program offices. This would likely reduce enforcement efforts overall which may backfire if it is later found that enforcement is lacking. Myron Ebell has noted that that was the case before the establishment of the OECA. He has also previously recommended that the EPA slash its total work-force by two-thirds, from 15,000 employees to 5000. Trump’s EPA nominee, Scott Pruitt did a similar slash of the state environmental enforcement unit in Oklahoma and has railed against what he called an EPA “activist agenda.” I am generally no fan of activist agendas but I am in favor of functional, sensible, fair, unbiased, and effective environmental regulation at both the federal and state levels.

    

References:

Report: Trucking Firms Using Gadgets to Cheat on Emissions – by Associate Press, in AP Business Insider, Jan. 16, 2017

Leaked Republican Bill Aims to “Completely Abolish” the EPA – by Robin Andrews, in IFL Science, Jan. 2, 2017

Justice Continues Criticism of WVDEP Inspectors – by Ken Ward Jr., in Charleston Gazette-Mail, Feb. 15, 2017

EPA Enforcement Office May Be Next on the Trump Team’s Hit List – by Katie Sheppard & Nick Visser, in Grist, Feb. 9, 2017

Rolls-Royce to Pay $800 Million in Fines for Bribery Scheme Hatched in Mt. Vernon - by Earl Rinehart, in Columbus Dispatch, Jan. 17/18, 2017