JoshHeaps.Net/JoshHeaps.Net/Content/Socialism/pilot-safeguards.md

title, section, order, summary

title	section	order	summary
Guarding the Pilot	Growing the Sector	66	The rules that stop people from gaming the pilot with sham co-ops, hidden owners, split-up borrowers, zombie firms, or a rigged review.

Guarding the Pilot

Any program that hands out money gets gamed. Venezuela's co-op boom produced tens of thousands of co-ops that existed mainly on paper (YES! Magazine, 2007). Uruguay's FONDES sent nearly half its money to three politically connected firms (El Observador, 2015).

This page lists the ways someone could cheat the pilot, or sabotage it, and the rule that blocks each one. Most of these tricks don't require breaking any law. They only need a loophole, which makes them the likeliest threats. So the rules are written to close the loopholes.

The hidden boss

The trick. A founder keeps the building, equipment, brand and software in a separate company they own. They sign up three friendly "members" and give the co-op a management contract or franchise deal with that company. The co-op borrows $3 million, and the money flows back to the founder as rent, fees and royalties. On paper it's a co-op. In practice it's the founder's business, funded by the public.

The rules:

• Every deal with an insider is disclosed. Any contract with a founder, manager, member's family, or a company they own is reported to the bank and checked each year to confirm it's priced like a deal between strangers. Overpayments are treated as a breach of the loan. After the loan is repaid, the same check continues as part of the lock, along with the two rules below on ending contracts and buying key assets (Deals with insiders).
• Members can fire management. Any management or franchise contract can be ended by a members' vote on short notice. A contract the members can't get out of is a boss.
• The business owns what it needs to operate, or can buy it. If key assets are leased from an insider, the bank gets a claim on them or the co-op gets an option to buy them at a fair price. That way the co-op can't be held hostage, and the bank's collateral is real.
• Membership is real. Probation lasts at most 12 months, counted across rehiring, and membership is automatic when it ends unless the worker opts out through the lock-holder. Members must do at least half the work hours in the co-op's second year and three-quarters from its third, counting hours worked through agencies or contractors. Pushing people out before they'd join is tracked and counts against the co-op (When People Don't Stay Long). All of this is checked every year. A co-op that falls short counts as failed in the pilot's survival measure.
• Lying costs something. False statements on a loan application mean immediate repayment, and the people who made them are personally liable.

Draining it through "investors"

The trick. Outside investors in a co-op get no vote and a claim that expires. But nothing so far limits how big or long that claim can be. A friendly investor could take 90% of the profits for 40 years, and the co-op would be a shell.

The rules, for pilot borrowers:

• The bank gets paid first. Any outside profit-sharing claim ranks behind the bank's loan.
• The bank must approve new claims. Claims last at most 15 years.
• Insiders' claims count as insider deals. An investment by a founder or their family is checked the same way as any other insider contract.

Splitting one borrower into many

The trick. The limit is $3 million per co-op. So a promoter, franchisor or landlord sets up 30 "separate" co-ops, each run by a relative or employee, and collects $90 million: a quarter of the fund, controlled by one person.

The rules:

• "Related" means economically tied, not just sharing names. Co-ops count as related, and share one $3 million limit, if they share a founder or manager, a franchisor, a landlord, a major supplier, an outside investor, or a paid promoter. Family members count as the same person, following the same kind of rules the tax code already uses for family ownership.
• Caps on middlemen. No single promoter, consultant or referral source can bring in loans totalling more than 3% of the fund.
• Money arrives in stages, as the business hits milestones, so a sham can't take the full amount and disappear.

Founders paying themselves first

The trick. A founder puts in $300,000 as a "loan" and books two years of "unpaid work" at an inflated salary. When the bank's loan arrives, the co-op pays the founder back first, with generous interest. The founder's money is out and safe, and public money has replaced it.

The rules (details in The Founder Problem):

• Founders' loans and back pay rank behind the bank. They can't be repaid from the bank's loan money, or while any payment to the bank is late.
• Back pay is valued at no more than the co-op's own pay for that job once it has revenue. Founder loans earn at most the Treasury rate plus three points.
• Salaries can't be used to skip the profit split. Founders can set their own pay in the founding bylaws for at most five years. After that, the members set all salaries. Pay for every role is disclosed to the bank each year, and the gap between the highest and lowest pay is published. Pay bands are open to every worker, nobody votes alone on their own pay, and high pay needs the agreement of the lower-paid half of the members as well as a majority of all of them (Who Sets the Pay).
• Payouts from members' accounts pass a solvency test, so insiders who see trouble coming can't cash out first (see Member Capital Accounts).

Relabeling an old business as "new"

The trick. A failing conventional business re-registers as a co-op to get a loan. That brings back the FONDES rescue problem through the side door. It would also flatter the survival numbers, because the business has already made it through its riskiest early years.

The rule. "New" describes the business, not the paperwork. If a co-op takes over an existing firm's assets, customers, location or most of its staff, it isn't new. It's either refused as a rescue or scored with the existing co-ops.

Keeping zombies alive

The trick. If the test fails, the bank shuts down. So the bank's own staff have the strongest reason of anyone to make the numbers look good. They can stretch out loans, let unpaid interest pile up, and keep dead firms technically open. A healthy co-op can also absorb a dying one, so the closure never shows up.

The rules:

• "Open" means actually operating: at least three members and sales above a minimum level. An empty shell counts as closed.
• Loans are valued honestly. At review, outstanding loans are valued at what a buyer would pay. A loan whose terms were eased to avoid default is marked down. Unpaid interest added to the balance doesn't count as income.
• Mergers are treated the same on both sides. A co-op absorbed by another co-op, and a conventional firm bought by another firm, are both counted as neither success nor failure. A second analysis counts them both ways.
• A merger that hides a failure counts as a failure. If a co-op was behind on its loan payments, or below the minimum sales level, at any point in the year before it merged, the merger counts as a closure. Nobody working for the bank, including the advisers, may arrange or suggest a merger.

Sabotage

The trick. An opponent recruits 25 or 30 plausible applicants, has them draw down their loans, strip the money and default. That pushes losses past the emergency stop and freezes the pilot before it reaches a verdict.

The rules:

• Fraud doesn't end the experiment. Under the emergency stop, lending restarts once the reviewers confirm the specific gaps are closed and the board signs off. Losses that are later recovered are credited back.
• The staged payouts and middleman caps above limit how much any ring can take before it's noticed.

Rigging the review

The trick. The headline thresholds are fixed, but a lot of smaller choices aren't: which firms count as matches, how closures are detected in the data, which years are included. Lobbyists on both sides would fight over each one, and whoever picks the reviewers picks the answer.

The rules:

• The analysis code is filed in advance, not just the plan, along with a digital fingerprint that shows it hasn't changed.
• The academic reviewers are nominated by the National Academies of Sciences, and nobody with ties to the bank or to co-op advocacy groups can serve.
• Any change from the filed plan must be signed, explained and published, and the result under the original plan is always reported next to it.

Rigging the price

The trick. A friendly bank chief could quietly undercharge co-ops, which is a hidden subsidy. A hostile one could overcharge them into failure.

The rule. The annual rate audit works in both directions. Undercharging is counted as a loss against the bank's results. Overcharging gets the affected loans repriced.

Political favoritism

The trick. This is what FONDES actually did: politicians steer loans to allies.

The rules:

• Every loan is public: the borrower, the amount, the rate and the terms.
• Every contact from an elected official or their staff about a specific loan is logged and published.
• The board answers to elected officials. Individual loans don't. The President can appoint and remove the bank's board at will. But by law nobody outside the bank can direct a decision on a particular loan except through the board, the board can overrule its staff only in writing and in public (Who has the last word), loan officers are career bankers the board hires and can fire only for cause, not political appointees, and a new board can't change the filed lending standards without the results being reported both ways (see Making It Last).