"Control Frauds Continue to Maim and Kill" By William K Black, UMKC, New Economic Perspectives, Dec. 31, 2011

The financial scandal and the Great Recession that it caused have understandably captured the bulk of our attention, but we must not lose sight of the fact that “control frauds” continue to maim and kill enormous numbers of people and damage the environment and society throughout the world. Several examples of these frauds have led to recent press reports. I write to point out that control fraud is the common feature of these scandals. I address four recent manifestations of control fraud: the French manufacturer of defective silicone breast implants, the death of many Filipinos in floods made lethal by illegal deforestation, the deaths and devastation 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 the UK. This first column explains the French breast implant fraud.

Varieties of Control Fraud

Control frauds occur when the persons controlling a seemingly legitimate entity use it as a “weapon” to defraud. Such frauds occur in the private, NGO, and public sector. I write primarily about accounting control frauds because accounting is the “weapon of choice” for financial control frauds. (Liar’s loans were the best ammunition, and subprime liar’s loans were the equivalent of teflon-coated bullets designed to pierce protective armor.) Shareholders and creditors are the primary intended victims of accounting control fraud, which creates record, but fake profits. Other forms of control fraud create real profits. Anti-purchaser control frauds target the customer and involve deception as to the quality and/or quantity of the product. Anti-public control frauds target the public. Illegal logging, the illegal seizure and exploitation of mines, and purchasing goods one knows are likely to be stolen are examples of frauds designed to harm primarily the public.

The French Manufacturer of Defective Breast Implants

Poly Implant Prothese (PIP) was a French manufacturer of saline and silicone breast implants. The FDA found severe problems with PIP’s production of saline implants a decade ago and 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 a necessary caution. Far too many people cannot believe that people who run corporations can be “real” criminals. CEOs can be despicable, and their approach to their customers can be loathsome. Mas CEO knowingly put the health of hundreds of thousands of women at risk.

“Haddad [Mas’ lawyer] said that Mas freely admits using unapproved silicone gel, but remains adamant it is safe.

“PIP knew it wasn’t in compliance, but it wasn’t a toxic product,” the lawyer said, adding it “had not been proven” the implants were any more likely to leak.

“The fact that it’s an irritant (when ruptured) is the same for all silicone gels….”
PIP used two types of silicone in its implants, Haddad said. One of them was an approved 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 its annual production of 100,000 implants.”

But the substitute gel was not “identical” and while medical-grade silicone is an “irritant” when an implant ruptures the non-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 unlawful silicone in its products in 2001, shortly after it received the FDA warning about its unsafe production methods (see here).

Theoclassical Economists Assume that Greater Consumer Choice is Unambiguously Good

Why would PIP continue to purchase some medical-grade silicone at five times the price?

“The tycoon at the heart of the breast implants scandal that has affected hundreds of thousands of women has admitted his company deliberately used inferior silicone gel.

The owner of bankrupt company Poly Implant Prothese (PIP) Jean-Claude Mas revealed that PIP sold protheses with industrial-grade silicone that had not been approved by health authorities to be sold at discounted prices. But wealthier clients were sold implants with high-quality gel, The Times newspaper reported. Mr Mas, 72, explained through his lawyer, Yves Haddad, 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 silicone implants, which could cause health problems if they burst or leak, 'did not formally receive approval' and regulations were violated. France's medical safety regulators AFSSAPS were never asked to inspect or approve the products.

Mr. Mas said there was a basic and a high-end version of the implant, but that the cheaper version - which was 'five times cheaper' - was just as effective as the costlier version.”

PIP did not inform its poorer customers that it was illegally selling them inserts made with cheaper, unapproved industrial-grade silicone (see here).

PIP also did not inform its customers that “the casing around the filling was also faulty and prone to rupture or leakage'” (see here).

Interpol’s Implicit View of the Seriousness of various Crimes

There were a flurry of press reports that Interpol had issued an arrest request 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 been issued a “red notice” for Mas, however it’s for an unrelated case — he was arrested in June 2010 for drunk driving, but left the country and did not show up for a scheduled court date.”

That Interpol incident illustrates brilliantly the difference in societal reactions to different varieties of crimes, but it also offers some hope. Drunk driving is a serious crime that often maims and kills. An individual impaired driver of a car can put dozens of lives at risk. A fraudulent CEO running a medical equipment company can put hundreds of thousands of lives at risk. Only a few decades ago it was rare for law enforcement to take drunk driving seriously, particularly if the driver was elite. A social movement, Mothers Against Drunk Driving (MADD), worked for many years to get society and law enforcement to think of drunk driving as grave crime. We need a similar social movement to get society and law enforcement to see control fraud as a grave crime worthy of an Interpol “red notice.”

Audacity

What separates the most destructive fraudulent CEOs from their lesser counterparts is audacity. The French (naturally) have a saying that captures the concept perfectly. “L’audace, encore l’audace, toujours l’audace” (audacity, more audacity, always audacity). Mas is off the scale when it comes to audacity. Mas exemplifies the Spanish meaning of his name (“more”). No sooner had he (for the second time) been found to have endangered his customers, than he was planning to go back into the business of producing and selling breast implants. (see here)

“The French head of the company at the centre of the international breast implant scare was employed by a second firm making [breast implants] set up by two of his children.
The plan described Mas, 72, as a "creative genius" and says its collaborators have "30 years of experience in the field of quality, research and development, production and commercialization of breast implants". It stated its aim was to produce 400 silicone gel implants every day at the former PIP production site in the south-east of France, to be sold to "the European, South American and Chinese market".”

It takes a special kind of depravity to describe oneself as a “creative genius” after a life of defrauding one’s customers through means that put their health at undue risk. I wrote an earlier column discussing what ring of hell Dante would make the frauds that drove the financial crisis reside in if he were able to write a modern Divine Comedy. After a career of preying on women, Mas should pray fervently that there is no physical or spiritual hell.

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