“Wink and a nod” contract consideration – part 2

The first part of this series of posts looked at the growing inability to prosecute political bribery because the courts and legislatures have enabled layers of opaque legal entities to hide the delivery of the political favors from the receipt of the “consideration.” As I noted in that part, no official “contract” exists other than a “wink and a nod” because donors have better, more hidden ways to enforce the “contract.”

Recall that every legal contract has traditionally required some form of “consideration,” be it money, goods or services, from each party in a contract in order for it to be enforceable. In this part, I will look at how changes in corporate structures have better enabled this hidden “wink and a nod” consideration in the corporate sphere, allowing many billions of dollars to traverse the globe without formal contracts, enabling tax avoidance and money laundering, and perhaps more nefarious purposes.

I want to note here a sea change in the last fifty years that has mostly gone unnoticed in the reversal of economic privacy between individuals and corporations. It was possible, in the days before credit cards, the internet, security cameras, and cell phones, for individuals to live full and productive lives in the United States while leaving behind virtually no records of their travels and economic transactions. You could work for cash and pay your bills in cash or hard-to-trace paper money orders. If you paid for your gasoline and hotel rooms via cash, you could travel the country freely without leaving much of a paper (let alone electronic) trail behind. If you didn’t travel, you left almost no records of your life behind at all.

Corporations, on the other hand, were more tightly tracked in the past eras. Stock was usually owned by identifiable individuals or institutions, and the company’s major property mortgages and other contractual liens were duly registered in county offices across the country, establishing a track of “consideration” to back up any potential court disputes. Money crossing international borders also left a clear bank trail.

More recently, this balance of anonymity has flipped. It is very difficult to move in public without your image being captured by multiple cameras. Not only are all of your financial transactions captured, but your internet browsing as well.

Increasingly, however, corporations realized that this thing called “contract consideration” sometimes got in the way of doing business. Part of this was perfectly legitimate and due to technology changes. For instance, it became inefficient for goods flowing from suppliers to retailers like Walmart or manufacturers like Ford Motor Company to be delayed by paper bills of lading and other financial documentation. Computers and data communications networks then enabled high-tech supply chain management systems that effectively separated the job of the inventory people on either side of the transaction from the job of the accounting people, who settle up the money later.

In a modern automobile assembly plant, goods from suppliers come into the door for “just in time” manufacturing, sometimes never spending a moment in inventory, let alone having time for a clerk to verify the paperwork. Electronic tagging and other innovations replace batches of paper and payment timing is negotiated separately between vendor and manufacturer.

I worked for one business, for example, that had such a complicated back-and-forth process of inventory and returns to and from a major customer that the outstanding financial charges were just “negotiated” a couple of times each year. It simply became humanly impossible to match a particular sale with a particular payment in consideration.

Ken Lay and Jeffrey Skilling of Enron Corporation were pioneers in turning the “degrees of separation” in the chain from suppliers through to customers into high art. By setting up hundreds of interlocking corporations, partnerships and LLCs, the tie of “consideration” to any goods, services, or corporate debt contracted to was buried beneath layers of legal shells. This distance, in turn, enabled numerous transactions, backdoor executive compensation payments, and tax avoidance strategies of dubious legality.

Enron collapsed largely due to the taking of “wink and a nod” consideration to unsustainable ends, but many businesses learned lessons, both good and bad, from this example. The Trump Organization, for example, consists of over 500 legal entities, and the evidence is mounting that many of their real estate transactions, both on the property purchase side and construction financing side, have a lot of “funny money” flowing through, as well as suspect tax avoidance maneuvers. [1] But the many complex layers of corporate obfuscation make any direct tie between suspect parties very hard to document. Like my inventory example above, the “settling up” may be more of a “negotiation” than a full accounting, and this “negotiation” may well involve something very far beyond a court-sanctioned settlement.

For good or for bad (well, really for bad), there are now hundreds of “Trump Organizations” operating in the United States alone, and many more thousands in the rest of the world. Unless the United States and other nations decide to do something about “wink and a nod” contract consideration, it is likely that more and more of the world’s wealth will slip outside the reach of national courts and their governments. This will not end well.


Notes:

  1. One of the best descriptions of the Trump money laundering process is Unger, Craig. “Trump’s Russian Laundromat.” The New Republic, 13 July 2017.

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