Union Reporting and Disclosure: Legislative Reform Proposals -Consideration of H.R. 993

Testimony Jobs and Labor

Union Reporting and Disclosure: Legislative Reform Proposals -Consideration of H.R. 993

July 17, 2003 18 min read
Paul Rosenzweig
Paul Rosenzweig
Visiting Fellow, The Heritage Foundation
Visiting Fellow, The Heritage Foundation

Testimony before the Subcommittee on Employer-Employee Relations in the Committee on Education and the Workforce, United States House of Representatives on June 24, 2003

Good morning Mr. Chairman and Members of the Subcommittee. Thank you for again giving me the opportunity to testify before you today on the topic of Union Reporting and Disclosure Requirements and, particularly, the utility of adding civil penalties to the Labor-Management Reporting and Disclosure Act ("LMRDA").

For the record, I am a Senior Legal Research Fellow in the Center for Legal and Judicial Studies at The Heritage Foundation, an independent, nonpartisan research and educational organization. I am also an Adjunct Professor of Law at George Mason University where I teach Criminal Procedure and an advanced seminar on White Collar and Corporate Crime. I am a graduate of the University of Chicago Law School and a former law clerk to Judge Anderson of the U.S. Court of Appeals for the Eleventh Circuit. For much of the past 15 years I have served as a prosecutor in the Department of Justice and elsewhere. During the two years immediately prior to joining The Heritage Foundation, I was in private practice representing criminal defendants. I have been at The Heritage Foundation since April 2002.

I should note, at the outset, that I had the pleasure of testifying regarding H.R. 4054 almost exactly one year ago, when the Subcommittee was considering that bill during the 107th Congress. While I certainly enjoy the pleasure of appearing here, I do hope that it will not become an annual event. As I testified last year, the current proposal in H.R. 993, which is virtually identical to the one we discussed last year, is, in my judgment, well thought out and deserving of your consideration. Nothing has changed in the past year to modify my conclusion in that regard. Therefore, with your permission, I am constrained to say that the Members of the Subcommittee may find my testimony somewhat repetitive - I can only hope that familiarity does not breed boredom.

As the Subcommittee will recognize, my perspective on the proposed legislation is different than that typically brought to the Subcommittee. I understand and appreciate the values of labor democracy and managerial transparency that animate the LMRDA. Certainly knowledge and information are among the most powerful tools in a democracy and union members are entitled to information about the activities of the organization to which they belong - just as the American public is entitled to information about Congress and shareholders are entitled to information about a corporation. But whether the particular substance and form of the reporting requirements of the LMRDA are good policy or not is a question I am, candidly, not qualified to answer.

The question I can answer, from the perspective of a former prosecutor and one who writes and teaches regularly on the criminal law, is the one that is the focus of today's hearing: Assuming that current (or proposed) LMRDA reporting and disclosure requirements are appropriate, what is the best means of enforcing those requirements and ensuring that labor unions and others obliged to report under the law comply with the law's requirements? That question is both normative and utilitarian - it asks both what is a just, or proper, method of enforcement for this type of law and also what method of enforcement will work most effectively. On both grounds the current structure of the LMRDA is wanting.

"Just Desert" and the Concept of Criminal Punishment

The LMRDA is unusual (and, as far as I can tell, unique) in its enforcement structure - it authorizes the Secretary of Labor to seek civil injunctive relief or to refer matters for criminal prosecution (pursuant to section 209 of the Act, (29 U.S.C. § 439)) but it does not, presently, contain any provision authorizing the imposition of civil monetary damages (either in federal court or administratively) for violations of the Act.

With this structure, the LMRDA is different from virtually every other regulatory statute. Typically, regulatory statutes have a graduated enforcement scheme that provides for administrative enforcement by the regulatory agency, civil enforcement actions in federal district court, and, for the most egregious offenses, criminal prosecution. Thus, the Occupational Health and Safety Act provides for both civil and criminal penalties, as do all of the environmental statutes, the antitrust laws, and the other regulatory statutes that have become common in American governance. Indeed, though it is always difficult to prove a negative, in the time I have had to conduct research on the question I have found no other regulatory statute with criminal enforcement provisions that does not also contain civil enforcement penalty provisions. In other words, the LMRDA is exceedingly unusual - and frankly, one can offer no rational explanation for the structure.

As a matter of theory the current structure of the LMRDA is normatively objectionable. Put most succinctly, government properly imposes criminal liability only on those who commit acts of misconduct with bad intent, and not on those merely accused of negligence or mistake. This is the fundamental moral component of the criminal law - the "just deserts" aspect of punishment - and it is trivialized when the criminal law is used to address conduct that is not intentionally wrongful. The criminal law in a free society must be carefully crafted to target wrongful conduct, and not be used simply to ameliorate adverse consequences attributable to non-criminal conduct. The public interest is vindicated not based on successful prosecutions, but on successful administration of justice. Criminal sentencing should reflect society's collective judgment about the kind of conduct that warrants the most severe condemnation, seizure of property, and loss of liberty and life.

The LMRDA's criminalization of an essentially regulatory scheme is, in one sense, part of broad pattern diverging from this model of criminal sanctions. Increasingly, we are seeing across the spectrum of federal regulatory systems prosecutions for offenses that are better handled as civil matters. In modern America, as the regulatory state has grown, the number of such criminal offenses has grown apace. These types of criminal offenses are different from the classic frauds and personal wrongs that ought to be the focus criminal law. This new type of offense involves the criminalization of conduct that, in most instances, is not inherently wrongful in the same way that fraud and bribery are. The growth in this form of regulatory criminal offense is, as Professor John Coffee has said, the "technicalization" of crime.

Consider: In 1999, the ABA Task Force on the Federalization of Criminal Law noted that there were now more than 3,500 federal criminal offenses. Those offenses incorporate either directly or by reference prohibitions contained in more than 10,000 separate regulations. Remarkably, nobody knows the exact number either of criminal statutes or criminal regulations. They are so diverse and so widely scattered throughout the federal code that they are literally uncollectable. I am told that, when it was recently asked to undertake the project, the Congressional Research Service said that the task was virtually impossible. This, too, breeds disrespect for the law and disaffection from the judicial system: When those who make the laws cannot themselves identify all the laws they have made, it borders on the arbitrary and capricious to allow prosecutors to select from among those laws and to criminalize conduct that, in the eyes of others, might warrant only civil sanctions.

This trend is exacerbated in the context of the LMRDA. The failure to timely file a required disclosure report is precisely this sort of technicalized offense and is inappropriately treated as a crime. The reporting requirements of the LMRDA, while certainly of great significance and importance to union democracy and the efficacy of the Act, are not the sort of requirement for which criminal sanctions are typically thought necessary. With the exception of situations in which a union official, for example, willfully and deliberately violates his known legal duty to report society ought not impose criminal sanctions.

The current LMRDA criminal provisions are not, however, completely objectionable. In one important sense section 209(a) is consistent with the general principle of criminal law. It punishes only those who act willfully. And, as the Second Circuit construed the statute more than 25 years ago, in United States v. Ottley, 509 F.2d 456 (2d Cir. 1975), an act in violation of the statute is done willfully only if it is done with a wrongful purpose - that is, if the defendant knew what the law required and failed to comply with it or was willfully blind to its requirements.

It is useful to note, parenthetically, that as a practical matter this standard is difficult for a prosecutor to prove - and deliberately so. It reflects a judgment (in my view a correct one) that the criminal sanctions should be rarely imposed and only on those who deliberately and willfully refuse to conform their conduct to societal norms.

But this does not, of course, exhaust the scope of appropriate governmental sanctions. Social behavior in a free society is governed by governmental norms that broadly distinguish between two kinds of wrongful acts: Crimes, which typically require such elements as malicious intent and harm, and deal with offenses against the state rather than merely against an individual; and civil wrongs, which are torts against persons or property, or violations of regulatory requirements, which are more loosely defined, typically carry lesser penalties or no penalties, and are adjudicated under less-rigorous procedural rules.

In the absence of applicable civil penalties, the LMRDA's structure leaves the latter category of wrongful conduct unaddressed. Just as it is inappropriate to criminalize conduct for which there is no deliberate wrongful act, it is equally inappropriate for the civil law to ignore the wrongful act and the civil harm that flows from the act in those situations where the wrongful act is the product of mistake, accident, neglect of a legal duty or otherwise non‑willful conduct. Imagine a world in which there were only criminal law and no tort system to redress civil wrong. Surely we would not think that structure well designed - yet that is precisely how the LMRDA works.

During testimony and hearings last year on H.R. 4054, some objections to the provision of civil penalties were raised. The most salient of these were ones offered by Mr. Robert O'Brien: He argued that the provision of possible civil penalties would discourage individuals from holding positions of trust within a union. In his view, the possibility that civil fines might be imposed would deter individuals from participating in union democracy for fear of being held liable for an inadvertent mistake and might also require the development of a new insurance system, akin to director and officer polices in corporations, that would increase the costs of holding office. He also argued the imposing civil liability on the union directly would impose costs on the union and divert resources from union functions hurting members who have done nothing wrong.

It is fair to say that these concerns are realistic - but it is also fair to say that they are not a sufficient ground for opposing this legislation. First, and most prominently, the exact same arguments can be made for virtually every other entity participating in the American economic system - including small business practitioners who have equally limited budgets, and small private partnerships whose members are equally effected financially by the errors of a few within the group. Not to mention the far heavier reporting burdens (accompanied by the threat of civil penalty) that apply to every American taxpayer. The proposition that union officials should be exempt from the same enforcement regime that applies to small businesses, taxpayers, and all other participants in the economy is, in my view little more than a version of special interest pleading. I know of no normative theory that suggests that the same enforcement incentives act differently in the context of unions than in the context of any other economic actor - to the contrary all economic theory suggests that it does not. Thus, absent some argument convincingly distinguishing unions from, say, small businesses, I can see no reason why on the same analysis, those supporting this position would not also support elimination of civil tax penalties for individuals or civil fines for small businesses that fail to report minor housing code violations.

Second, I wonder at the seeming inconsistency inherent in the assessment of the magnitude of the problem by those opposing civil penalty provisions. On the one hand, they argue that the current enforcement system works and there is little need to change it - but if this is so, then the addition of civil penalties will have little, if any, effect on union officer recruitment since the current set of "good practices" will serve to conclusively insulate officers and unions from civil liability. On the other hand if the addition of civil penalties to the statute results in a significant number of new civil cases that ultimately result in the imposition of significant civil fines, then the underlying premise of opposition to changes in the enforcement system - that is, the premise that all is well and no change is needed - will have been proven demonstrably false. In either case, I see little normative basis for opposing the use of less severe sanctions when more severe criminal sanctions already are on the books.

In sum, as a matter of just deserts the current structure of the LMRDA is simply flawed. It is necessary to recapture the balance between criminal and civil law by providing an alternate civil sanction in those situations where enforcement is necessary but criminal prosecution is simply inappropriate.

Effective Deterrence

Now, I turn to the second aspect of the inquiry in today's hearing -- the question of effectiveness. As Horace Mann said, "The object of punishment is the prevention of evil." We might tolerate an oddly structured enforcement system, however philosophically objectionable, if it were effective. But - contrary to the seeming premise I've just identified - it seems to me evident that the present enforcement regime is not as effective as it ought to be.

In report year 2002, the most recent year for which data are available from the Department of Labor, 43% of all unions either filed their LM-2s late or failed to file them. Over 4,000 unions (4,238) failed to file at all - that is 14.8% of the total number of filers (29,178). Even if one focuses on only the large unions - that is unions with receipts greater than $1,000,000 -- where one would expect compliance to be more complete, the numbers are still poor. Thirty six percent file late or not at all, and of that number 3.3% (65 out of 1947) don't file.

Moreover, the problem seems to be getting worse. If, for example, we look at filing year 2000, the overall late and/or fail to file rate was 34%. The comparable rate of 43% today is a 26% increase in just two years.

Imagine if 43% of all corporations failed to file their SEC disclosure forms timely (or at all). Or if 43% of production plants in America didn't file their pollution monitoring reports on time. In those contexts that rate of non-compliance would be a scandal. The only explanation for this rate of non-compliance that one can posit is that the absence of a sure and certain enforcement regime causes a failure in deterrence and thus a lack of incentive to comply.

This is not pure supposition - the limited data available support the conclusion. Because of their draconian nature, the criminal sanctions of the Act are rarely utilized. As the GAO reported in 2000, Department of Justice officials are (appropriately) reluctant to prosecute cases criminally where reporting violations are the only basis for the case. An electronic database search reveals approximately 50 cases in the last 43 years prosecuted under section 209 of the Act. And of these, the vast majority of the reported cases were prosecutions for knowing false statements on required forms - that is deliberate willful lies. Typically these frauds were in service a larger criminal enterprise - they were, for example, used for the purpose of concealing some other substantive crime (e.g. embezzlement of union funds).

Indeed, my research disclosed only one case - United States v. Spignola, 464 F.2d 909 (7th Cir. 1972) - involving a pure willful "failure to file" case, without any indicia of personal benefit to the union official or union who failed to file the requisite forms. And that case resulted in a reversal of the conviction.

Plainly this search may understate the instances of criminal enforcement of the Act under section 209 - not all criminal cases brought are reported in the electronic databases. But I think it is fair to say that the criminal enforcement authority of section 209 is rarely used. And this is understandable - the criminal sanction is the societal blunderbuss reflecting, as I've already noted, a high degree of moral opprobrium. Criminal penalties are not appropriate in most failure to file cases and the Departments of Labor and Justice are rightly hesitant to seek criminal penalties for such conduct.

But in the absence of alternative civil sanctions, as the GAO noted, when criminal penalties are not appropriate the Secretary is reduced to hoping for the voluntary compliance of unions with their LMRDA reporting obligations. There is no middle ground sanction to be applied between the blunderbuss of criminal law and the paring knife of voluntary compliance. In effect, the substantial and serious penalties attending criminal sanctions make them effectively unusable for the run-of-the-mill case where a reporting requirement is not met.

Comparing Regulatory Enforcement Structures

It is also useful I think to offer some comparisons to other regulatory agencies on a practical level. So I asked a question - how does the LMRDA enforcement structure compare with other regulatory programs? Given the limits of data availability, I chose three comparisons - the IRS' individual taxpayer program; the FEC's political committee reporting program; and another program within Labor involving pension fund ERISA reporting - for comparison. I also chose these because all three involve areas where there are some large participants but where there are also a significant number of small participants (individual taxpayers, small PACs, and small businesses) who would, presumably, be subject to many of the same incentives and have many of the same concerns regarding the use of civil enforcement that small unions might have.

IRS -- Here is what my inquiry discovered for tax year 2002 for the IRS:

Number of individual tax returns filed 130,904,889

Number of Non-filers 1,963,000

Rate of Non-filing 1.5%

[The number of non-filers is taken from the IRS non-filer program in which the IRS uses information from third parties to create substitute returns for the purpose of assessing taxes.]

While, admittedly, a somewhat indefinite number, this rough analysis suggests that the non-filing rate among even the largest unions is more than twice as large as that for the smallest individual taxpayers. And if we include (as I believe is a more valid comparison) all unions, then the non-filing rate is roughly 10 times greater for unions than for individual taxpayers. In other words Teamster-size unions are twice as bad at reporting as Ma and Pa Taxpayer, while the small unions are 10 times as bad.

It is, obviously, almost impossible to be certain why this is so - far more data would be necessary for a statistically valid regression analysis. But I found it notable that the mix of civil and criminal enforcement is vastly different at the IRS than at Labor. In 2002, the IRS initiated just over 1000 criminal investigations and, ultimately, just fewer than 500 indictments and informations (472) were returned. Of these, 144 cases were charges against "non-filers." By contrast, the IRS assessed civil penalties in just over 18 million cases.

Perhaps of more significance to the question presented in this legislation, the IRS assessed civil penalties against over 2 million individual tax filers who were delinquent in their filing (that is, either late or failed to file altogether). The disparity between the number of civil and criminal actions is stunning. Though, as I said, proof of a connection is not conclusively possible on this record, my understanding of the concepts of deterrence reinforces my instinct that the significant use of civil sanctions is the driving force behind the lower rate of non-filing exhibited by the IRS statistics.

FEC - Recent changes at the FEC are also somewhat instructive in assessing the merits of the proposed legislation. Prior to 2000, the FEC lacked a significant administrative civil penalty program - to secure fines for late filing the FEC was obliged to proceed by way civil complaint. In other words the FEC stood in relation to political committees that filed late or not at all almost exactly as the Department of Labor would stand with respect to unions who file LM-2s if H.R. 993 becomes law. It, in effect, had the civil authority that H.R. 993 would give Labor. Yet even that modest enforcement mechanism was found too cumbersome and too significant a drain on FEC resources.

As a consequence, with Congressional authorization, in 2000 the FEC began an administrative fine program that routinely, and almost mechanically, imposes civil administrative financial penalties on campaign committees and PACs (many of whom are quite small) that fail to file or file their required disclosure forms late. The FEC administrative mechanism is particularly instructive because among the factors taken into account by the FEC in assessing the civil fine is the size of the entity whose failure is at issue - political committees with less than $50,000 in activity are fined as lower rates than larger organizations. Since the program was initiated in 2000, the FEC has imposed administrative fines in 602 cases. Fine amounts are modest - the total amount collected is $838,000, or roughly $1,400 per case.

There is some evidence that this new administrative program has influenced the timely filing of FEC reports. In 1999-2000, 36,568 reports were filed with 6,684 or 18% late- or non-filings. In 2001-2002, the first year after the new program went into effect, 34,472 reports were filed with 5,129 or 15% late- or non- filing. According to the FEC, the number of late or non-filers continues to decline in the current cycle, though no data is yet available.

ERISA -- Under the Employee Retirement Income Security Act (ERISA) the Department of Labor receives approximately 1.3 million Form 5500 and Form 5500-EZ filings per year. The Department has statutory authority to assess civil penalties up to $1,000 per day (now $1,100 with inflation adjustment) against plan administrators who fail to file complete and timely annual reports.

The Employee Benefits Security Administration (EBSA) and its predecessor agency have used their authority to administratively reduce penalties in a variety of initiatives designed to provide incentives for compliance with the filing requirements. These initiatives seem to have been quite successful. For example, during the Clinton Administration a March 1992 "grace" period resulted in the filing of 40,000 Form 5500 and Form 5500-EZ reports and the collection of approximately 40 million dollars.

In March of 1995 DOL established the Delinquent Filer Voluntary Compliance Program (DFVC). This program resulted in approximately 1,000 new filers per month. To promote voluntary compliance this program administratively reduces fines so that the most a DFVC late-filer is fined is $4,000. EBSA of course retains the discretion to seek stronger enforcement for those who it deems worthy of more significant punishment.

The EBSA experience is not directly applicable to the LM-2 question before you, as EBSA has the civil authority that the LMRDA enforcement branch lacks. Still, it seems to me that the EBSA program is evidence of the converse proposition: that an agency with an enforcement structure including strong statutory civil fining authority may be empowered, thereby, to implement a program of lesser fines and sanctions as an incentive to obtain compliance with filing requirements. The combination of power to impose a large fine and administrative ability to impose lesser sanctions appears to provide an agency with the greatest capacity to craft incentives to insure timely filing - which, after all, is the true goal

The lack of such authority in the LM-2 filing context is palpable: With no fear of the blunderbuss that is never used and no other incentive for voluntary compliance, unions have no reason to act vigorously to ensure compliance with the LMRDA. The civil sanctions proposed in H.R. 993 are tools appropriate to the enforcement task and commensurate with the scope of the regulatory injuries they seek to address.

H.R. 993

Finally, let me turn to the text of the bill before you. In general it is a salutary efforts to remedy the flaws in the current enforcement structure of the LMRDA. By giving the Secretary of Labor civil authority to secure monetary penalties from delinquent or deficient unions the legislation will give the Secretary an important, indeed, essential tool for achieving compliance with the reporting requirements of the Act.

It is highly likely that the imposition of civil penalties will have a deterrent effect of precisely the sort that is necessary. The structure for the administrative penalties chosen is both moderate and measured. The bill requires the Secretary to takes into account the nature of the violations involved; the revenues of the violator; and the violator's prior enforcement history. Thus, it focuses accurately on questions of the magnitude of the harm and recidivism that are commonly understood as the appropriate metrics for calibrating punishment.

If I could offer one suggestion concerning this bill it would it would be to explicitly incorporate a graduated civil sanction based upon the intentional nature or scienter of the conduct in question - accidental violations or those arising through neglect ought to result in fines less severe that those arising from gross negligence or deliberate but non-willful conduct. Perhaps that is what the bill intends to capture by specifying that the Secretary take account of the "nature of the violations involved" but greater clarity on the issue would be welcome. Such a modification would also address the concerns of some that penalties for an "inadvertent mistake" would potentially bankrupt a union.

Mr. Chairman, thank you for the opportunity to testify before the Subcommittee. I look forward to answering any questions you might have.

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Paul Rosenzweig
Paul Rosenzweig

Visiting Fellow, The Heritage Foundation