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  • What to do about Apple and Fraud Friendly Manufacturing in China?

    Bill Black: We need to ban imports produced while breaking laws of China -   February 13, 2012
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    William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics. Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement. Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.


    What to do about Apple and Fraud Friendly Manufacturing in China?PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington.

    Well, the press has been filled with controversy about Apple and other computer companies taking advantage of terrible working conditions in China and other Asian countries. We [incompr.] heard about Foxconn and the threats and actual suicides of workers and threats of mass suicide in protest to the conditions. But what should people in the advanced countries that are using cell phones and iPads and such, taking advantage of all of this, what should they say to their governments about what should be done to hopefully stop this?

    Now joining us to talk about this is Bill Black. Bill is associate professor of economics and law at the University of Missouri. He's also the author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.


    JAY: So we've seen depictions in investigative pieces in The New York Times and other places about all of this, and it's rather terrible and draconian, some of the conditions workers face. What should people say to their governments in places like the United States and Canada and Europe and such?

    BLACK: They have to demand an end to cheaters prospering and driving honest companies out, and cheating countries prospering and driving the workers to despair in the countries in which they're more honest.

    JAY: So what law exists now that would allow them to do that if there was any political will to do so?

    BLACK: Well, the laws that typically exist, they're actually violating laws left, right, and center in China. So there are actually three strands of stories that should have been brought together, and our work tries to draw it together. But the big media has not put it together.

    The three strands are this. There was this story about how President Obama met with Steve Jobs—then, obviously, alive and the head of Apple. And President Obama said, what would it take to bring back suppliers jobs for Apple to the United States? Because it turns out that Apple's jobs are overwhelmingly abroad. And then the second series of stories was about the release by Apple of its—what they call audit of their suppliers, which found massive illegality continuing year after year. And then the third was investigative reporting and Jon Stewart about the suicides, primarily at Foxconn. But some broader scandals I'll talk about in a minute as well.

    In the first story about bringing the jobs back, Jobs answered—again, Steve Jobs—was they're never coming back. But that story has the following anecdote. Steve Jobs takes the prototype iPhone out of his pocket, shows his key engineers and executives that there are scratches on it, and says, I want this perfect in six weeks. And then it's this wonderful story about how they go to China and they get people working around the clock, and within six weeks they have scratch-free glass and it's all working. Right? That's story one.

    Story two—and these are the Apple audits. So remember, this is not some independent entity coming in to investigate, and it's not a real investigation. This is mostly Apple going out and looking at what is obvious on the books and records of its suppliers, who are overwhelmingly in China.

    JAY: And this audit has to do with following some kind of regulations in terms of working conditions and hours and actually paying people and things.

    BLACK: It has to do with that. It has to do with Apple's contract with the worker—with the suppliers. And it has to do with the laws of China and the other nations in which they're operating. And it turns out the suppliers are routinely violating all three things. So they violate their contracts with the workers, they violate their contracts with Apple, and they commit a whole series of illegal actions under the law of China, which not only cheat the workers but put their health and even their lives at risk.

    So, for example—and remember, again, this is just what's obvious on the face of the records. And these places, these suppliers know that Apple comes in every year and looks at these records. What did they find? They found that more than half of the suppliers routinely defrauded the employees' wages due to them. Right? In other words, whatever you think is the disparity in pay between the U.S. and China is actually much larger, because the reported pay is in many cases not actually received by the workers.

    They also found that a significant number of Apple suppliers coerce abortions. They illegally, and, again, in violation of contracts, subject female employees to pregnancy tests. And so if you want to keep your job, you better (a) not get pregnant, and (b) if you do get pregnant, you'd better have an abortion.

    Three. Twenty-five percent of Apple suppliers illegally dispose of toxic materials. And then they do a whole bunch of other series of violations as well.

    But here are the two kickers. First, for most of these places, the suppliers have violated—engaged in these violations, and Apple has found these violations every year that the audit has been conducted. So if Steve Jobs had applied the same approach—I want a perfect answer in six weeks—none of these problems would occur, because [crosstalk]

    JAY: So Apple's aware of all of this. And what the—I know Apple says that they have tried, or taking some steps to try to change this situation. I mean, is any of that effective? And, of course, it's not only Apple involved in these practices.

    BLACK: No, and that's important to emphasize. It isn't only Apple. And no, overwhelmingly it is not effective, and Apple's audits show that.

    But let me emphasize a more subtle point. Apple's suppliers know the audit is going to occur. They know they have a terrible track record. They know the auditors will come in. They know the auditors will report that for the fifth straight year they have violated. They don't even bother to create a phony set of records for hours worked, which with a computer costs $150. That's how bad the situation is when they don't even bother—

    JAY: To cover it up.

    BLACK: —to hide their frauds.

    JAY: Now, before we get to what could be done in terms of, you know, the U.S. government or Canadian government or such, we shouldn't neglect to talk about the—what Chinese government—. I mean, first and foremost, you would think it's the responsibility of the Chinese government to enforce their own laws and not allow such fraud.

    BLACK: No. This is a double Gresham's dynamic. A Gresham's dynamic in this context is when unethical activity drives ethical activity out of the marketplace.

    And so it begins with Apple putting such severe pricing pressure in the bidding for suppliers that only cheaters can win the bids. And then the suppliers can only do this if they can get away with it. I've talked about the Apple end of getting away with it, that they routinely get away with it, and there's so little concern with Apple that they don't even bother to hide their violations from Apple. But on top of that, of course, they have to get away with it in terms of China, and China could bring in severe criminal sanctions against them. And Chinese prisons are terrible places to be.

    And so the second Gresham's dynamic is among nations. The nations that are most fraud-friendly win this competition for where the suppliers will locate, because they need to have a safe haven for their frauds. So among the frauds are making people work more than 60 hours a week, where The New York Times articles report that the people develop such severe edema—that's huge swelling—that they are unable to walk even normally and are forced to waddle. Now, that may just sound embarrassing, but edema is actually very dangerous in terms of heart—cardiac risk as well. And all of these things cause you to make mistakes when you're that exhausted, and that's when terrible things happen to people's bodies. Also, if you do 60 hours of repetitive motion—and, again, some of the investigations show this—you have enormous numbers of people who essentially cannot—lose all ability to move their wrists and hands.

    JAY: But you would think China would now at least have the leverage to say to Apple and these other computer companies that if you deal with suppliers who don't follow the law here, you know, you can't threaten us so easily just to go do it somewhere else, 'cause if you can't follow the law here, then we're not going to let you sell your products here, which is the biggest market in the world. I mean, China has some leverage, but is there any indication they're using it?

    BLACK: None. China is afraid, because wages have gone up some—real wages, despite the frauds I've talked about—that they will lose the competition, that the even less ethical nations will win. So they're very afraid of Vietnam, they're very afraid of Korea and such as competitors in many of these things.

    And as you noted in your initial discussion, some of these things aren't simply eventually dangerous to life; some of them are immediately dangerous to life, so that there were two explosions in Apple suppliers plants that caused severe injuries and death. And these came immediately after the receipt of warnings from outside groups that the dust concentration posed a severe risk of explosion.

    Now, that's in the interest of the supplier, right? You know, you lose money when your plant explodes. But the story, the initial story by The New York Times got it almost completely wrong. It claimed that the key advantage China had was having more engineers. In truth, the key advantage it had was having the kind of engineers who would ignore the dust buildup, who knew the risks but would simply allow it.

    And even more, one of the Apple suppliers used a nerve toxin to clean those unscratchable screens. Why? Because the nerve toxin dried much more quickly than the safer cleaning product, so you could do four times as many jobs, you know, units in the same amount of time. And, again, that was not stopped by the supplier. That was stopped only when the workers and NGOs revolted in China.

    JAY: Bill, is there anything under American law that would be illegal to knowingly work with suppliers and other countries that break the laws of those countries?

    BLACK: Potentially, but it'd be extremely difficult case. You'd have to say that Apple was in essence a co-conspirator, that Apple knew that its economic pressures inherently created these dangers, that its audits found these dangers, and that audit—and that Apple consistently simply sent ineffectual letters saying, clean up your act, got a promise, of course we'll clean up our act, and—.

    JAY: Well, that sounds like what you're saying, that if you—the way you we describe it, they do sound like co-conspirators.

    BLACK: Well, they are, but it's exceptionally difficult case. And this administration is not about to bring a case against Apple, nor would any Republican candidate for their nomination, if they became president, would they ever bring such [crosstalk]

    JAY: So what is needed to try to deal with this?

    BLACK: Well, it's almost certainly going to have to come from us as people. And the us, as you mentioned earlier, isn't just people in the United States, but Canadians and people throughout much of the world. Part of it is someone needs to develop a green rating for which companies are less damaging to the environment, which I've only briefly mentioned, the assault on the environment because of this, but to workers in particular. And then consumers can put more pressure on countries not to do this.

    The United States should have an industrial policy in which it brings these jobs home. And the United States most assuredly can tell the Apples of the world that you must stop a regime that is based on this double Gresham's dynamic, endemic control fraud against employees, and an assault on your suppliers' workers and the environment.

    So we need a jobs policy here that says, we're going to re-create the supplier network, all of which used to exist in the United States and has been exported to China, primarily, and to some other nations that are—again, are the most fraud-friendly. And we are a far bigger market than China, by the way, for these electronics still. Now, I mean, that may change in five years, but we have the economic power to demand that—and, as you say, it's not just Apple—that these suppliers start using humane, honest, non-fraudulent practices. And if so, U.S. competitors can be very strong.

    JAY: So in theory, if there was the political will to do so, which clearly there isn't, but if there was, you could have legislation that says, you can't import, bring back these products from Asia and sell them in United States if they're created through breaking the laws of the countries where they are produced.

    BLACK: Correct. And, indeed, this is really interesting in terms of the World Trade Organization. The World Trade Organization prohibits all kinds of subsidies and unfair advantages in trade. This is the most obvious subsidy and unfair advantage, and the one that has the most compelling need to change. Have you ever heard a word out of the WTO about the need to end this kind of abuse that causes the least honest suppliers in the least honest nations to prevail in world trade?

    JAY: And, of course, 'cause it's being driven primarily by American and European corporations. Thanks very much for joining us, Bill.

    BLACK: Thank you.

    JAY: And thank you for joining us on The Real News Network.


    DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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