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When Scandals Go Global

The cockroach theory of financial scandals says that, for every one you see, hundreds more are hiding in the woodwork. So it was in the U.S., when the scandal at Enron was followed by blowups at WorldCom, HealthSouth, and elsewhere. And so it is now abroad: first Dutch grocer Ahold, then Italian dairy-products company Parmalat, and now Hollinger International Inc. (HLR), the newspaper company controlled by Conrad M. Black, a Canadian-born British lord.

Scandals break out in bunches because they have common causes. They occur when insiders take advantage of weak corporate governance, feeble government oversight, and a financial system that too often looks the other way.

Indeed, Parmalat's failure reflects badly on what were some of the biggest names in international finance in the '90s. Bank of America (BAC), Chase Manhattan, Bank of Boston, Deutsche Bank (DB), Barclays (BCS), and Merrill Lynch (MER) sold billions of dollars in Parmalat debt over the years. While there's no evidence that the financial giants broke rules, a little skeptical probing would have revealed the rot at the heart of Parmalat years ago.

The slow-motion fall of Conrad Black appears to be a case of high-handedness and questionable governance. The press baron is denying allegations in a lawsuit that he arranged payments to himself and others that weren't properly authorized by the board of directors. If the board let Black run Hollinger for his own benefit, it reflects badly on luminary directors such as Henry A. Kissinger and Richard N. Perle.

There is obvious harm to these companies' shareholders and creditors, such as Parmalat bondholder AFLAC Inc. Less visible but more serious is the destruction of trust, which makes it harder for honest companies to raise the money they need to grow. Overseas, as in the U.S., the solutions are clear: Transparency. Accountability. Tough audits. And criminal penalties for those who cheat. Halfway measures are an invitation to more cheating.

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