VIA FEDERAL EXPRESS (Tracking Number 8278-6288-9900)Dear Secretary Chao:RE: Petition to Initiate a Rulemaking with respect to the Labor-Management Reporting and Disclosure Act of 1959
Congress intended the Labor-Management Reporting and Disclosure Act of 1959 (LMRDA)[1] to be an instrument for union members to hold their unions and union officials accountable. According to Assistant Secretary of Labor D. Cameron Findlay's recent congressional testimony, the Department of Labor (DOL) is now planning to "look carefully at everything" being done to "ensure that [the DOL is] doing the best job [it] can to enforce this important law on behalf of individual union members."[2]
The National Legal and Policy Center (NLPC) welcomes this much needed
regulatory review because the DOL's current regulations and procedures
fail to give full effect to the congressional purpose behind the LMRDA.
Furthermore, as the recent Enron accounting debacle has made all too clear,
there is a pressing need for tough financial regulations for all organizations
entrusted with larges sums of Americans' hard-earned money. The DOL must
do more to improve labor union accountability.
The NLPC was especially interested Mr. Findlay's suggestion that your
department intends to consider reforming "its enforcement plans" under
the LMRDA and "disclosure forms" which unions file pursuant to the LMRDA.[3]
To aid in this regulatory review and to encourage the DOL to move forward
on such reforms, the NLPC submits this Petition to request that the DOL
initiate a rulemaking under the Administrative Procedure Act[4]
to amend and expand the DOL's Labor Organization Annual Financial Report
rules[5]
promulgated under the LMRDA.
Since 1997, the NLPC has been dedicated to investigating and exposing
union corruption at every level. In publishing the fortnightly newsletter,
Union Corruption Update, the NLPC has observed and cataloged hundreds
of cases of union embezzlement and other union-related crimes.[6]
The high level of union embezzlement in America today[7]
is an indication that the DOL must do more under the LMRDA to ensure that
unions are financially sound and are accountable to the workers whom they
represent.
Moreover, reforms targeted at deterring union embezzlement should have
the added benefit of improving union accountability across the board. That
is, any regulatory reforms that the DOL pursues should be oriented—as Congress
intended when it enacted the LMRDA—at promoting union democracy and the
individual rights of union members; more information and more accurate
information will enable members to have a greater voice in electing union
leaders and deciding how union funds are spent. This Petition, therefore,
is intended as a blueprint for the DOL and its prime-LMRDA agency, Office
of Labor-Management Standards (OLMS), to enact the type of reforms that
were broadly outlined in the DOL's FY2003 Annual Performance Plan, which
called on the OLMS to "explore means to enhance union transparency, increase
information available to union members, and better inform union members
of their rights."[8]
Toward this end, Part I of this Petition provides the relevant background
of union financial reporting and disclosure, and Part II explains why there
is a growing need for regulatory reform—including reform of the Labor Organization
Annual Financial Report Form ("Form LM-2"), which is filed and disseminated
pursuant to the LMRDA. Finally, Part III details five specific financial
reporting and informational disclosure reforms that the DOL should incorporate
into any rulemaking that it undertakes in response to this Petition and
its impending regulatory review.
I. Background of Union Financial Reporting and Disclosure
In response to the widespread union corruption and lack of accountability uncovered in 1957-1959 by Senator John L. McClellan, the Senate Select Committee on Improper Activities in the Labor or Management Field, and the committee's general counsel Robert F. Kennedy, Congress enacted the LMRDA, also known as the Landrum-Griffin Act.[9] According to the statute itself, Congress found so many "instances of breach of trust, corruption, disregard of the rights of individual employees, and other failures to observe high standards of responsibility and ethical conduct" by union officials that legislation was "necessary to eliminate or prevent improper practices on the part of labor organizations" so as to protect "the rights and interests of employees and the public generally."[10]
To help meet the need for accountability and financial integrity, Congress
included a number of financial reporting and informational disclosure provisions
within the LMRDA. The following legislative summary by the House Committee
on Education and Labor (a pivotal committee in the drafting of the LMRDA)
indicates Congress' strong intent that the LMRDA's reporting and disclosure
provisions be sufficiently broad and intrusive so as to facilitate genuine
accountability to union members and to deter the abuse of union funds:
The members of a labor organization are the real owners of the money and property of such organizations and are entitled to a full accounting of all transactions involving such money and property. Because union funds belong to the members they should be expended only in furtherance of their common interest. A union treasury should not be managed as though it were the private property of the union officers, however well intentioned such officers might be, but as a fund governed by fiduciary standards.In short, the intent of Congress was to deter unaccountable procedures and conduct, such as union embezzlement, by making union affairs and finances as transparent and as public as possible.. . . Similarly the rules governing the conduct of the union's business, such as dues and assessments payable by members, membership rights, disciplinary procedures, election of officers, provisions governing the calling of regular and special meetings—all should be known to the members. Without such information freely available it is impossible that labor organizations can be truly responsive to their members.
It is the purpose of this bill to insure that full information concerning the financial and internal administrative practices and procedures of labor organizations shall be, in the first instance, available to the members of such organizations. In addition, this information is to be made available to the Government, and through the Secretary of Labor, is to be open to inspection by the general public. By such disclosure, and by relying on voluntary action by members of labor organizations, it is hoped that a deterrent to abuses will be established.
. . . The committee believes that union members armed with adequate information and having the benefit of secret elections, as provided for in title IV of this bill, will be greatly strengthened in their efforts to rid themselves of untrustworthy or corrupt officers. In addition, the exposure to public scrutiny of all vital information concerning the operation of trade unions will help deter repetition of the financial abuse disclosed by the McClellan committee. Where union financial abuses and other practices do not meet reasonable standards, although not willfully dishonest, this bill will have remedial effect. Under provisions of the committee bill, both labor organizations and their officers are under obligation to make full and accurate report.[11]
B. Deterrence under the LMRDA's Reporting and Disclosure Provisions
Cost-benefit analysis is a helpful tool for analyzing the intent of Congress to deter unaccountable procedures and conduct by unions and union officials through reporting and disclosure. For illustration purposes, consider the circumstances surrounding union embezzlement. Assuming that a union embezzler is rational—i.e., seeking to maximize his self-interest—he embezzles when the benefits of embezzling outweigh the costs of being caught and punished, discounted by the probability of being caught and punished.[12] Thus, a rational potential embezzler will opt not to embezzle when the formula is reversed; that is, when the costs of embezzling, discounted by the probability of those costs being imposed, is greater than the benefits of embezzling[13]—which is exactly what the LMRDA attempts to do.
The analysis is applicable to other unaccountable and undemocratic union practices as well. By requiring that all union expenditures be transparent and publicly available, the LMRDA deters union officials from spending union funds contrary to the will of the rank-and-file. Examples of such expenditures could include unreasonable officer salaries, unnecessary assets,[14] or controversial charitable contributions. Unaccountable union officials are more likely to allocate union resources in a manner that is inconsistent with the choices of the membership when they think they can get away with it. The deterrent effect comes from the fact that the LMRDA's mandated transparency facilitates union members imposing costs on union officials, such as an election defeat.
One way to deter unaccountable union practices is to increase the cost,
which Congress did, for example, by criminalizing union embezzlement in
the LMRDA.[15]
However, as the cost-benefit formula indicates, probability and costs are
closely linked. Congress recognized this fact—if the probability of being
exposed or caught were close to zero, imposing a very high cost—such as
long prison terms and hefty fines—would not significantly deter union embezzlement,
for example. Thus, Congress wisely enacted reporting and disclosure
provisions to help increase the probability that union embezzlers and
others engaging in unaccountable practices are detected by the members
as well as by rival union officials, investigative journalists, law enforcement
officials, and the general public. Therefore, if properly and effectively
enforced, the LMRDA could go a long way towards promoting accountability
and financial integrity in unions.
C. Relevant Statutory Provisions
This Petition focuses on five reporting and disclosure provisions that Congress enacted to effectuate the LMRDA's deterrence objective and promote union accountability.
1. 29 U.S.C. § 431(b) -- Requires unions to file an annual financial report with the Secretary of Labor. Section 431(b) itemizes the compulsory information, which includes assets, liabilities, receipts, loans, "salary, allowances, and other direct or indirect disbursements" to officers and employees of the union, as well as "other disbursements made . . . including the purposes thereof." Importantly, § 431(b) requires unions to report this information "all in such categories as the Secretary may prescribe." Equally important, this section mandates that union must report this information, "in such detail as may be necessary accurately to disclose its financial condition and operations for its preceding fiscal year."
2. 29 U.S.C. § 435 -- Makes unions' annual financial reports public information. Section 435 also empowers the Secretary to publish these reports and requires the Secretary to promulgate regulations to make these reports available for "inspection and examination." It further requires that the Secretary enact regulations for the DOL to furnish copies of these reports.
3. 29 U.S.C. § 438 -- Gives the Secretary "authority to issue, amend, and rescind rules and regulations prescribing the form and publication of reports required to be filed under [§ 431(b) and other reporting and disclosure sections] and such other reasonable rules and regulations . . . as he may find necessary to prevent the circumvention or evasion of such reporting requirements."
4. 29 U.S.C. § 440 -- Empowers the Secretary "[w]henever it . . . appear[s] that any person has violated or is about to violate any of the [reporting and disclosure] provisions of [the LMRDA], . . . [to] bring a civil action for such relief (including injunctions) as may be appropriate."
5. 29 U.S.C. § 415 -- Mandates a general informational duty for
unions. It states: "Every labor organization shall inform its members concerning
the provisions of this Act."
D. Relevant Regulatory Provisions
The DOL has promulgated five regulations under the regulatory grants 29 U.S.C. §§ 435 and 438 that are relevant to this Petition. The regulations are:
1. 29 C.F.R. § 403.2 -- Annual Financial Report
2. 29 C.F.R. § 403.3 -- Form of Annual Reports—Detailed Report
3. 29 C.F.R. § 403.4 -- Simplified Annual Reports for Smaller Labor Organizations
4. 29 C.F.R. § 403.8 -- Dissemination and Verification of Reports
5. 29 C.F.R. § 403.10 -- Publication of Reports Required under this Part
While the titles of these regulations adequately describe how each fits
into the statutory provisions outlined in Part I.C of this Petition, it
is important to note that § 403.3 requires unions to fulfill their
annual financial report duty, under 29 U.S.C. § 431(b), by filing
"Form LM-2" with the DOL. Additionally, § 403.4(a)(1) permits unions
with gross annual receipts of less than $200,000 to elect to file a less
detailed form, "Form LM-3," rather than the LM-2. Section 403.4(b)(1) also
allows union with gross annual receipts of less than $10,000 to elect to
file an even more simplified form, "Form LM-4," rather than the LM-2 or
LM-3. Finally, unions with no assets, liabilities, receipts, or disbursements
during a reporting period may elect to avoid the LM forms and instead file
a "simplifed annual report" under § 403.4(b)(2).
II. The Need for Financial Reporting and Disclosure Reform
The DOL has failed to exercise its full statutory grant of authority from the LMRDA, and in some instances, it has failed to perform its affirmative statutory duty under the LMRDA.[16] The DOL has not done everything it is permitted or required to do to increase the probability that union embezzlement and other unaccountable union activities are detected. As a result, the intent of Congress to promote union democracy and financial integrity through deterrence has been frustrated. Therefore, regulatory reform is needed to ensure that the LMRDA's reporting and disclosure provisions are effectively enforced.
The need for regulatory reform is evidenced by unions' poor compliance with the LMRDA's reporting requirements. As detailed in Part II.B of this Petition, far too many unions file late annual financial reports or none at all. New regulations are needed to discipline the DOL into fulfilling its duty to bring civil lawsuits to compel unions to comply with the reporting provisions, which are integral to effectuating the LMRDA's design to promote union accountability across the board.
Further, Part II.C illustrates that there is an unacceptably high level of union embezzlement in America today. Similarly, embezzlement case source data, outlined in Part II.D, suggests that the DOL should be doing more to provide union members and the public with all the financial information that the LMRDA requires. The DOL's current annual financial report regulations do not provide, as Congress had wished, for "a full accounting of all transactions involving [union] money and property" nor do they provide "full information concerning the financial and internal administrative practices and procedures of labor organizations."[17] More stringent reporting standards for annual financial reports and broader disclosure of such reports are necessary to better promote transparency and financial integrity with unions.
In the end, the reforms proposed in this Petition will help combat the
problems outlined below and will move the DOL's enforcement closer to the
prevention-by-deterrence ideal that Congress envisioned when it enacted
the LMRDA. That is, these reforms will enhance workers' ability to hold
their unions and union officials accountable.
B. Reporting Violations Data in Support of Reform
In June 2000, the General Accounting Office (GAO) reported a significant problem with delinquent filing and non-filing of annual financial reports by unions, in violation of 29 U.S.C. § 431(b).[18] In the wake of the GAO report, Representative John Boehner, Chairman of the Committee on Education and the Workforce, requested follow up data from the DOL in July 2001.[19] In response, the OLMS provided Rep. Boehner with a letter, dated August 15, 2001, updating the delinquency and non-reporting data.[20]
According to this OLMS letter, 34.04% of required annual financial reports
(not just LM-2s but all reports) were "received late or never" for Report
Year 2000[21]—that
is 10,359 of 30,436 unions filed late reports or no reports at all.[22]
Likewise for Report Year 1999, 28.91% or 8,947 out of 30,944 unions filed
late reports or no reports.[23]
Finally, for Report Year 1998, 30.37% or 9,677 out of 31,861 unions filed
late reports or no reports.[24]
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Moreover, the DOL has been aware of the negative impact of this noncompliance. For instance, the DOL's Employment Standards Administration (ESA), which oversees the OLMS, identified the noncompliance in reporting as a problem in its FY1999 Performance Report, which was conducted pursuant to the Government Performance and Results Act. According to that report, "[t]imely reporting is essential to attaining" the LMRDA's "union democracy and financial integrity" objectives, and that "an important agency goal is to increase the rate of timely reporting compliance with unions" filing the LM-2.[26]
While this FY1999 report noted some improvement in compliance from FY1997 and FY1998 to FY1999,[27] the DOL's FY2001 Annual Report shows that most of these improvements were lost in FY2000 and FY2001.[28] Further, the data provided by the OLMS to Congress, supra, as well as the OLMS's failure to meet the DOL's FY2001 Performance Goal for LM-2 compliance[29] illustrates that the DOL and the OLMS need to do more to improve compliance with the LMRDA's reporting requirements. In addition to whatever steps the DOL is already taking to improve compliance,[30] the DOL should implement the reforms presented in Part III.A of this Petition to improve the timely filing of annual financial reports under the LMRDA.
C. Union Embezzlement Data in Support of Reform
The current "wave"[31]
of union embezzlement is evidenced[32]
by 1) the large amount of restitution in criminal cases in recent years
and 2) the sheer pervasiveness of union embezzlement today in that it affects
a majority of unions.
1. Union Embezzlement Restitution Data
The restitution that union officials and employees pay (or are under court order to pay) to union treasuries is the single best statistic to measure the level of union embezzlement for three reasons. First, unlike convictions, fines, months of confinement, or similar statistics, restitution captures the genuine gravity of the crime because it is generally correlated with the amount of harm suffered by the victim (i.e., the amount embezzled from the union). Second, through our research experience, the NLPC has discovered that when restitution is agreed to as part of a guilty plea or ordered by a court, the restitution amount frequently equals 100% of the embezzlement amount.[33] Third, when a conviction is secured, restitution is paid in the majority of cases; for example, in FY1998 and FY1999, 79% of union embezzlement convictions resulted in restitution, according to the GAO.[34]
Recent restitution amounts are alarming. From FY1990 to FY1995, the OLMS reported that prosecutions yielded $22,269,137 in restitution.[35] According to the GAO, union embezzlement prosecutions garnered $3,770,400 in restitution in FY1998 and FY1999.[36] Additionally, the NLPC has uncovered $7,394,008 in union embezzlement restitution for FY2000, FY2001, and FY2002.[37] Amounts for FY1996 and FY1997 were unavailable. Nevertheless, over the approximately last ten fiscal years in which data is available or at least partially available, a total of $33,433,545 in restitution has been paid or at least ordered to be paid to union treasuries.
The level of union embezzlement that this restitution data represents
is too high.[38]
It illustrates that the DOL's reporting and disclosure regulations are
not deterring union embezzlers as Congress intended when it enacted the
LMRDA. Additional reforms, such as the reforms proposed in Part III of
this Petition, are needed to reduce this high level of union embezzlement
and to promote financial integrity within unions.
2. Union Embezzlement Pervasiveness Data
Union embezzlement today is not limited to a few historically corrupt unions such as the four unions targeted by the federal government in the 1980s: the Hotel and Restaurant Employees, Laborers, Longshoremen, and Teamsters.[39]Within just the last two years, for instance, at least 59% of unions affiliated with the AFL-CIO (40[40] of 68[41])— as well as the AFL-CIO[42] itself—have had a union embezzlement or a closely related case of wrongdoing. Moreover, many other unions that are unaffiliated with the AFL-CIO have been likewise infected by union embezzlements.[43]
The number of unions infected is particularly disturbing when one considers that in 1959, Congress enacted the LMRDA largely on the basis of the McClellan hearings and that those hearings focused on wrongdoing within a mere five unions.[44] If Congress could act on data from five unions, surely the DOL could act on data that 59% of the AFL-CIO's affiliated unions have recently been victims.
Furthermore, union embezzlement is also not limited to a few large industrial States such as California, Illinois, New Jersey, and New York; rather, it has spread to almost every State. For example, within just the last two years, there has been a union embezzlement or a closely related case of wrongdoing in at least 80% of the Several States and the District of Columbia (41 out of 51).[45]
This level of union embezzlement pervasiveness is too high.[46]
It further illustrates that DOL's reporting and disclosure regulations
are not deterring union embezzlers as Congress intended when it enacted
the LMRDA. Reforms, such as the reforms proposed in Part III of this Petition,
are needed to combat and reduce the pervasiveness of union embezzlement
today.
D. Case Source Data in Support of Reform
The need for regulatory reform is further evidenced by the source of union embezzlement cases. As Congress expected when it enacted the LMRDA, financial reporting and disclosure are vital to the detection of union embezzlements—a fact that is illustrated by data concerning union embezzlement investigations conducted by the OLMS.
Since 1979, the OLMS has sponsored the Compliance Audit Program (CAP), in which OLMS investigators enforce the LMRDA through audits of local unions' administrative and financial operations.[47] As the result of these CAP audits, the OLMS opened 70 union embezzlement cases in FY1998 and FY1999, according to the GAO.[48] At the same time, the OLMS processed a total of 754 union embezzlement cases in FY1998 and FY1999.[49] Therefore, in FY1998 and FY1999, 684 union embezzlement cases came from non-CAP sources—for example, complaints from union officials, union members, and other members of the public. In short, 9% of the union embezzlement cases came from the OLMS's audits and 91% of the cases came from other sources.
Given these striking percentages, there is no excuse for the DOL to continue to fail to perform its LMRDA duties and to not use all of its statutory grant of authority under the LMRDA. With such a vast majority of union embezzlement cases resulting from outside complaints, the DOL should do everything—such as the reforms proposed in Part III of this Petition—it is statutorily required and allowed to do to provide more information and higher quality information to members and the public. While the NLPC applauds the DOL's FY2003 budget request for 40 additional OLMS employees,