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Apple's Foreign Suppliers Demonstrate Widespread Scamming and Horrific Abuse of Employees

Apple's bombshell report on its suppliers shows anti-employee practices as common as iPods. White collar criminologist William K. Black investigates.

Apple has released a report on working conditions in its suppliers’ factories, highlighting a form of control fraud (fraud in which the head of a company subverts it for personal gain) that criminology has identified but rarely discussed.  I write overwhelmingly about accounting control fraud because it drives our recurrent, intensifying financial crises.  The primary intended victims of accounting control frauds are the shareholders and the creditors.  Other private sector control frauds target customers (e.g., George Akerlof’s 1970 article on “lemons”), and the public (e.g., the unlawful disposal of toxic waste, illegal logging, and tax fraud).

Anti-employee control frauds most commonly fall into four broad, but not mutually exclusive, categories – illegal work conditions due to violation of safety rules, violation of child labor laws, failure to pay employees’ wages and benefits, and frauds based on goods and loans provided by the employer to the employee that lock the employee into quasi-slavery.  Apple has just released a report on its suppliers that shows that anti-employee control fraud is the norm .  Remember, fraud is hidden and is often not discovered and Apple did not have an incentive to make an exhaustive investigation.  Apple calls its inquiries “audits” and it is apparent that most of its information comes from reviewing written and electronic records at its suppliers.  That is exceptionally revealing.  The suppliers know that they can defraud their employees with such impunity that they don’t even bother to get rid of records that prove their frauds.  Apple has resisted making public its suppliers and the report refused to identify which suppliers committed which violations – often for years despite repeated, false promises to end their anti-employee control frauds.  Two other facts are evident (but not reported).  First, Apple rarely terminates suppliers for defrauding their employees – even when the frauds endanger the lives and health of the workers and the community – and even where Apple knows that the supplier repeatedly lies to Apple about these fraudulent and lethal practices.  Second, it appears unlikely in the extreme that Apple makes criminal referrals on its suppliers even when they commit anti-employee control frauds as a routine practice, even when the frauds endanger the worker’s and the public’s health, and even when the supplier repeatedly lies to Apple about the frauds.  Apple’s report, therefore, understates substantially the actual incidence of fraud by the 156 suppliers (accounting for 97% of its payments to suppliers). From the New York Times:

The company said audits revealed that 93 supplier facilities had records indicating that more than half of their workers exceed a 60-hour weekly working limit. Apple said 108 facilities did not pay proper overtime as required by law. In 15 facilities, Apple found foreign contract workers who had paid excessive recruitment fees to labor agencies.

And though Apple said it mandated changes at those suppliers, and some facilities showed improvements, in aggregate, many types of lapses remained at levels that have persisted for years.

The New York Times, the Wall Street Journal, and the Washington Post articles on the Apple report are all lengthy, but none of them has any input from a criminologist and each of the articles misses most of the significance of the report. The most fundamental flaws have to do with why anti-employee control fraud is the norm at Apple’s suppliers and why the suppliers typically don’t even take the inexpensive efforts necessary to avoid holding a paper trail that makes the frauds obvious even to a not terribly vigorous audit that they know is coming.

If there is one single thing that drives us white-collar criminologists around the bend it is the implicit assumption that fraud cannot be common. There is, of course, no logical (or experiential) reason for this belief. Nevertheless, it is a common belief and among economists it is a virtually universal dogma. Economists have a tribal taboo against even using the word “fraud” to describe individual frauds. The surest way to be considered an un-serious economist is to use the “f” word to describe frauds by elite economic actors. Economists’ taboo is particularly bizarre because it is economic theory, developed by a Nobel Laureate that explains why fraud can become endemic. George Akerlof, in his famous article on markets for “lemons” (largely describing anti-customer control fraud), explained the perverse “Gresham’s” dynamic in 1970: "[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”

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