2014 was the year that nine-figure government settlement deals with corporations passed from shocking anomaly to normal event.
The Department of Justice collected a record $25 billion in penalties and fines this year. Many of these out-of-court deals to resolve charges of corporate crime were with Wall Street banks atoning for the bad behaviors that precipitated the financial meltdown. Others were pharmaceutical companies accused of false marketing or other medical firms accused of bilking Medicare.
These companies might seem to have no good reason to celebrate as this year's holiday festivities near, but most can find a silver lining. The huge settlement agreements typically came packaged up with nice holiday stocking stuffers for the corporations accused of committing crimes.
Many of the largest settlements this year, addressing allegations of some of the most egregious crimes, have allowed companies to deduct their payments from taxes.
For example, the record-breaking $16.65 billion settlement between the Department of Justice and Bank of America in reality cost the corporation several billions less than the amount advertised in headlines and press releases. The value of this unadvertised giveback: at least $4 billion.
When these payments get deducted from taxes, they become just another business expense rather than an explicit punishment. That's the wrong message to send about an agreement that's meant to deter the kinds of crimes Bank of America was accused of committing.
The Bank of America settlement was just one of many sizable settlements signed this year that allowed payments to be deducted from taxes. HSBC settled with the FHFA for $1.2 billion, and because the agreement failed to prevent it, the bank can take a $192 million tax break. In another Federal Housing Administration settlement this year, the door was left open for Goldman Sachs to take a $420 million tax windfall from its $1.2 billion payment.
It's not just banks getting this sweet deal, either. Several huge pharmaceutical companies have settled allegations of everything from Medicare fraud to misleading marketing. Consider:
• Extendicare, a company that provides nursing care for elderly people, was accused of providing care so "substandard as to be effectively worthless". The settlement the company ultimately agreed to was billed as worth $38 million, but it included a clause stating that no section of the text "constitutes an agreement by the United States concerning the Federal Settlement Amount for purposes of the Internal Revenue laws." The Department of Justice thus ensured that the payment could be written off by Extendicare as an ordinary business expense, earning a tax windfall of $13.3 million. Providing worthless care to elderly citizens on the public dime shouldn't be business as usual.
• Endo Health Solutions was similarly accused of misleading marketing practices in the sale of Lidoderm, a local anesthetic. The company agreed to settle criminal and civil claims for $192.7 million, making the deal the largest healthcare settlement of the year. However, just $20.8 million of the total was specifically labeled as a penalty, leaving the remaining $171.9 million unclassified and therefore tax deductible. Endo Health Solutions will ultimately be able to take a $60 million tax giveback for its dangerous marketing practices.
• Shire Pharmaceuticals, accused of advertising the use of Adderall and various other ADHD drugs for off-label use, settled for $56.5 million, but because the payment can be deducted, it comes with a tax giveback of $19.7 million.
The fact that companies can deduct their settlement payments is more than just offensive in principle. Every dollar in tax windfalls that companies collect to subsidize their wrongdoing must be made up for by American taxpayers through higher tax rates, program cuts, or more national debt.
Settlements don't have to come with tax deductions. Many federal agencies specifically deny deductibility just by including a few key phrases in the agreement. Just this year, the Environmental Protection Agency settled with both Hyundai and Kia over allegations of misleading consumers about fuel economy ratings. The two car companies paid a total of $100 million, making this settlement the largest of its kind. The EPA specified that any penalties associated with the settlement could not be deducted for tax purposes. By being completely explicit about this, the EPA saved American taxpayers at least $35 million.
Government agencies are responsible for holding companies accountable when they break the law. These agencies sign settlement agreements on behalf of the American people. They sign more each year, without any real public oversight or standards for transparency.
As a result, we often can't know what's in these deals and what isn't. Are the deals effectively providing relief for the injured parties? Do settlements do enough to deter bad corporate behavior, discourage repeat offenders? Are they wrapped up with big unannounced tax deductions?
2014 has seen some of the biggest settlement agreements in history, with billion dollar deals grabbing headlines almost monthly. But 2015 should be the year these deals become more open and accountable. Instead of just big numbers, we should aim for big results that protect the public.
To read an in-depth report on corporate tax write offs for wrongdoing, click here.