- Examine white-collar crimes.
- Examine blue-collar crimes that harm businesses.
- Examine the crimes committed by businesses.
Imagine that you work in a publicly traded corporation as an accountant. One day, your manager calls you. You sense desperation in his voice as he whispers, “Quick! Shred the paper copies of the financial records!” Will you do it? After all, how can shredding paper be a crime? Not so fast. It may be a crime under the Sarbanes-Oxley Act, specifically if you destroy documents before the statutory length of time required to hold them. After studying this section, you should be able to recognize when the answer to such questions should be a resounding “No!” Indeed, after reading this section, you should be able to spot criminal activity, which may lead to tough decisions, such as whether you should be a whistleblower or not.
This section addresses crimes relevant to business concerns. A business must be concerned about criminal activity from the inside, from the outside, and through its own actions.
White-collar crime is a term used to describe nonviolent crimes committed by people in their professional capacity, or by organizations. These crimes are committed for financial gain, often through deception. Historically, this term derives from a reference to the “white collars” that managers, executives, or professionals who committed these crimes wore as their everyday attire, rather than the “blue collars” of the factory workers and laborers. White-collar crimes are not typical street crimes, like burglary or robbery, and they are not person crimes, like murder or rape. Rather, the term is used to describe crime committed in the professional work environment, for the purpose of obtaining a financial reward through the use of deception. White-collar criminals frequently commit their crimes on the job, in broad daylight, while sitting at a desk.
But what leads an otherwise successful businessperson or organization to commit a white-collar crime? After all, if someone is earning a good salary, or if a business is financially healthy, why would he or she choose to violate the law? While names like Kenneth Lay of Enron and Bernie Ebbers of WorldCom are virtually synonymous with corporate greed, lack of ethical decision making, and fraudulent behavior, these examples do not provide satisfactory answers to this question. Indeed, businesses must be vigilant against white-collar crime, because there is no absolute way to identify those who might turn to criminal behavior in the workplace. White-collar crime can involve fraud or larceny, organized crime, cybercrime, and environmental crime.
Fraud and Larceny
White-collar crimes generally involve the use of deception to acquire money or property. This is the very definition of fraud. Many white-collar crimes are versions of fraud. Sometimes, white-collar crime involves outright larceny, which is the trespassory taking of property with the intent to deprive the owner of the property. In both types of white-collar crime, the criminal is trying to take property for his or her own financial gain.
Fraud is found in many contexts. For instance, many regulatory violations, like insider trading, are forms of fraud. Specifically, these are securities fraud. Securities fraud is when someone uses deception to circumvent the regulations or statutes interpreted by the U.S. Securities and Exchange Commission (SEC) to acquire money or property. Goldman Sachs was recently charged by the SEC for securities fraud, because it allegedly misrepresented material facts to investors to gain financially. Check out Note 10.49 “Hyperlink: SEC v. Goldman Sachs” to review the complaint.
Hyperlink: SEC v. Goldman Sachs
One of Goldman Sachs’s employees, Fabrice Tourre, self-named the “Fabulous Fab,” was also named as a defendant in the complaint. Do you think that the Fabulous Fab should bear criminal liability for misleading investors, even if he did mislead investors?
The Fabulous Fab’s testimony before Congress:
Health care fraud is also a common type of white-collar crime. A physician who submits false claims to health insurance companies to receive money is a common example. Check out Note 10.51 “Hyperlink: Health Care Fraud’s Epidemic” to see the U.S. Department of Justice’s comments regarding health care fraud.
Hyperlink: Health Care Fraud’s Epidemic
This link is a video of the U.S. Department of Justice’s comments concerning recent indictments against several individuals accused of creating “straw patients” to submit claims to Medicaid to receive money. You can see how someone who creates fake patients to receive money has committed fraud, because he or she is using deception (fake patients) to acquire money (Medicaid payments).
Insurance fraud is the use of deception to receive insurance funds. For instance, if someone falsely reports that her office was burglarized and her computer equipment was stolen, and asks her insurance company to cover the loss, then this constitutes insurance fraud. This is because the person is lying (using deception) to acquire an insurance payment (acquiring money). A common context for insurance fraud is arson. If someone intentionally burns down his office building because he wishes to collect under his fire insurance policy, then he has committed insurance fraud by arson. Arson is the act of intentionally setting fire to property.
Financial institution fraud is fraud against banks and other similar institutions, such as credit unions. The IRS investigates financial institution fraud. Cases of financial institution fraud can involve people who falsify tax documents, or profit and loss statements to gain funding from banks, as well as those who commit money laundering. Check out Note 10.56 “Hyperlink: Financial Institution Fraud” for several financial institution fraud cases, most of which are excellent examples of white-collar crime.
Hyperlink: Financial Institution Fraud
Consider another type of fraud, where the deception is perhaps better hidden. Bernie Madoff committed massive fraud in a scheme known as a Ponzi scheme. A Ponzi scheme is a pyramid scheme, where people pay in. Those at the top of the pyramid may receive something that appears to be a return on their investment, but those at the bottom do not. This is because the funds paid in by those at the bottom are used to pay the people at the top. Those who operate Ponzi schemes generally solicit investors, and those who invest in such schemes are expecting a legitimate return on investment (ROI). However, the master of the Ponzi scheme does not really invest the funds. He simply takes them, and keeps his early “investors” happy by bringing in new investors, whose money he gives to the old investors as their ROI. This allows the Ponzi scheme to continue, because it appears from the outside that investors are receiving a legitimate ROI. The problem is that the capital contributions eventually disappear, since they are never invested but are simply used by the criminal for his own purposes, including covering his tracks for as long as possible by paying investors with fake ROI payments as necessary. To continue, the pyramid must get bigger and bigger. That is because new investors must be attracted to keep the cash flow going. Eventually, of course, pyramids will eventually collapse under their own unsustainable structure. Check out Note 10.58 “Hyperlink: The Mechanics of a Pyramid Scheme” for an illustration of a pyramid scheme from the SEC.
Hyperlink: The Mechanics of a Pyramid Scheme
Madoff was a wealth manager who defrauded investors out of billions of dollars. How does someone get away with this? Interestingly, Harry Markopolos, a financial analyst, flagged Madoff’s actions to the SEC as statistically impossible long before Madoff was caught. Check out Note 10.59 “Hyperlink: Too Good to Be True? Statistically Impossible Returns” to watch Mr. Markopolos explain this by using sports analogies. This raises interesting legal questions regarding whether the SEC is proactive enough. The SEC actions are often reactive, responding to a situation after it happened.
Hyperlink: Too Good to Be True? Statistically Impossible Returns
Investors aren’t the only potential victims of white-collar crime. Owners of businesses are also potential victims. For example, embezzlement is a common crime, and it occurs when someone takes property that was in his or her possession lawfully and then converts it to his or her own use. As you can see, Bernie Madoff was an embezzler because he lawfully had possession of his clients’ money, but then he wrongfully converted those funds to his own use, rather than exercising his fiduciary duty to his clients. Embezzlement differs from larceny, because larceny requires the trespassory taking of property with the intent to deprive the owner of the property. In other words, in a larceny, the thief is not supposed to have possession of the property to begin with. Someone who embezzles something, however, has the right to be in possession of the property to start with but then wrongfully converts it (steals it) for his or her own use. Embezzlement strategies can involve forgery, which is counterfeiting someone else’s signature or other document. It can also involve wire fraud if the embezzlement uses electronic communications.18 U.S.C. §1343. Refer again to Note 10.4 “Hyperlink: Thefts, Skimming, Fake Invoices, Oh My!” to learn about many different embezzlement schemes.
Corporate espionage and misappropriation are crimes in which a competitor or would-be competitor has acted illegally to obtain trade secrets of another. The Economic Espionage Act is a federal statute that criminalizes the theft of trade secrets. In a recent case of corporate espionage, Starwood Hotels sued Hilton, claiming that Hilton, along with some of its executives, stole millions of dollars in confidential trade secrets that were used to compete with Starwood’s successful chain of hotels.
While the term “organized crime” often summons images of the mafia, that is not the only type of organized criminal activity in this country. Consider the recent case against Pfizer, which settled with the U.S. Department of Justice in 2009. Pfizer’s subsidiaries, Pharmacia and Upjohn, had been selling pharmaceuticals “off-label” in doses and for uses not approved by the Food and Drug Administration (FDA), and it had been providing kickbacks to physicians to prescribe those drugs. The subsidiaries agreed to plead guilty to misbranding with the intent to defraud or mislead. They paid a criminal fine of more than one billion dollars and forfeited their profits from their illegal activities. Not only did they plead guilty to a criminal violation, but they also had to pay a hefty penalty for violating civil law, particularly related to paying kickbacks to physicians.FBI Press Release, “The Case Against Pfizer: A Record $2.3 Billion Settlement,” September 2, 2009, http://www.fbi.gov/page2/sept09/pfizer_settlement_090209.html (accessed September 27, 2010).Kickbacks are incentive payments that are given to someone who makes decisions to encourage others to pay for something. The repercussions of this conviction are certainly felt by those who were without knowledge of these acts, such as the shareholders and many employees, not to mention the patients who were subjected to off-label marketing in the contexts of what otherwise should have been trusting relationships with their physicians.
The Racketeer Influenced and Corrupt Organizations Act (RICO) is a federal statute that, if violated, can add substantial prison time to a convicted criminal’s sentence. Even if someone is not per se involved with organized crime, RICO charges can be brought against a defendant who has violated the statute. This statute punishes those engaged in a pattern (at least two) of racketeering activities—which include a wide range of activities typically associated with organized crime—over a ten-year period,18 U.S.C. §1961(5). when funds from those activities were used to maintain, operate, or acquire a legitimate business. Racketeering activities include crimes such as loan-sharking, bookmaking, money laundering, counterfeiting, smuggling, blackmailing, human trafficking, and other similar crimes. Although RICO was written to target traditional organized crime, less than 10 percent of RICO cases filed have been against the mafia. RICO is now used against insurance companies, stock brokerages, tobacco companies, banks, and other large commercial enterprises. RICO also has a civil provision allowing a competitor to file RICO charges, which come with triple damages if the suit is successful.
Bribery occurs when someone pays a government official to influence the official’s decision or actions in his or her official capacity for the benefit of the person paying the bribe. The Foreign Corrupt Practices Act (FCPA) outlaws bribery by U.S. companies doing business in foreign lands, though grease payments are permitted. Grease payments are payments given to speed up a process that will occur, rather than to influence a decision. However, companies should be very careful in relying on the grease payment exception, since such payments are legal under the FCPA only if they are also legal under the laws of the country where the grease payments take place, and there are very few jurisdictions (if any) where they are indeed legal. States also have statutes against bribery.
Money laundering occurs when funds gained from illegal activities are processed through a seemingly legitimate business to “clean” the source of those funds. For example, someone who received $10,000 for criminal activities will need to “clean” the money to be able to use it legitimately. One way this can be done is by setting up a business that handles a lot of cash, which appears to be a legitimate business. This business can overstate its earnings by $10,000 over time by running the money through its books, thereby “cleaning” the funds. For example, if the business was a tavern, and the tavern grossed $12,000 per month, the ill-gotten $10,000 could be spread out over ten months by having the business claim that it grossed $13,000 each month. In that way, the ten thousand would eventually be “laundered” or “cleaned,” because it will appear to be money received by the legitimate business itself.
In that example, if someone found out about this money laundering operation and threatened to go to the authorities unless a payment was given to him to keep quiet, then that would be a form of extortion known as blackmail. Blackmail occurs when someone threatens to reveal a harmful truth, such as involvement in criminal activity, but agrees to remain silent if paid. Extortion is when someone obtains property through coercion. Another example of extortion is when a neighborhood gang extracts “protection payments” from local businesses. Essentially, the gang requires payment from local businesses periodically, and if the business refuses to pay, then the gang injures the business or its owner in some way, such as through vandalism or battery.
In organized crime cases, there can be strong incentives for people not to do the right thing. Maybe they are afraid of punishment by the government. But they may also fear punishment from their organized crime communities. In such cases, sometimes people do not tell the truth when they should. Someone who lies under oath, even if he or she thinks there’s a good reason to do so, has committed the crime of perjury. Additionally, such a person might be charged with obstruction of justice, which is acting in a manner that creates obstacles to the administration of justice.
Antitrust laws seek to prevent activities that reduce or eliminate economic competition. Agreements “in restraint of trade” are prohibited.Sherman Act, 15 U.S.C. §1. These crimes involve things like collusion, allocating markets, price-fixing, and bid-rigging. Criminal convictions have been obtained for bid-rigging contracts for milk for school children, price-fixing for residential doors, and price-fixing for steel wool scouring pads.Anne K. Bingeman and Gary R. Spratling, “Criminal Antitrust Enforcement” (joint address, Criminal Antitrust Law and Procedure Workshop, American Bar Association Section of Antitrust Law, Dallas, TX, February 23, 1995), http://www.justice.gov/atr/public/speeches/0103.htm (accessed September 27, 2010). Check out Note 10.76 “Video Clip: Who Said Antitrust Is Boring? Not Hollywood!” for the movie trailer of The Informant!, which is based on an actual antitrust case involving illegal price-fixing.
Video Clip: Who Said Antitrust Is Boring? Not Hollywood!
Check out the movie trailer for The Informant!, which portrays the criminal price-fixing activities of senior executives at ADM Co., which is a major agribusiness. Which commodity was being price fixed? Lysine! Here is part of the trailer:
Congress has addressed antitrust activities through the passage of several major pieces of legislation, though not all carry criminal penalties. Specifically, the Sherman Anti-Trust Act carries criminal penalties for antitrust violations, but other antitrust laws do not.
Cybercrimes are crimes that are committed virtually from a computer or over the Internet. These crimes are on the rise, and they include activities like hacking and identity theft. Cybercrime is a broad term that includes many white-collar crimes. Cybercrime is ubiquitous these days, because virtually every desk has a computer on it. These crimes can range from non-white-collar crimes (like possession of child pornography) to traditional white-collar crime, involving the use of deception to acquire money.
The Computer Fraud and Abuse Act is a federal statute that carries punishments for compromising computers used in interstate commerce or communication. It punishes those who access a computer to commit fraud, among other things. See Table 10.1 “Summary of Computer Fraud and Abuse Act Compromising Confidentiality Provisions”Computer Crime and Intellectual Property Section, United States Department of Justice, “Computer Fraud and Abuse Act,” http://www.justice.gov/criminal/cybercrime/ccmanual/01ccma.html (accessed September 27, 2010). for a summary of the provisions that carry criminal punishments, as well as the statutory sentences.
Table 10.1 Summary of Computer Fraud and Abuse Act Compromising Confidentiality Provisions
|Obtaining national security information||(a)(1)||10 (20)|
|Compromising the confidentiality of a computer||(a)(2)||1 or 5|
|Trespassing in a government computer||(a)(3)||1 (10)|
|Accessing a computer to defraud and obtain value||(a)(4)||5 (10)|
|Knowing transmission and intentional damage||(a)(5)(A)(i)||10 (20 or life)|
|Intentional access and reckless damage||(a)(5)(A)(ii)||5 (20)|
|Intentional access and damage||(a)(5)(A)(iii)||1 (10)|
|Trafficking in passwords||(a)(6)||1 (10)|
|Extortion involving threats to damage computer||(a)(7)||5 (10)|
|* The maximum prison sentences for second convictions are noted in parentheses.|
The Unauthorized Access to Stored Communications Act is a federal statute to protect the confidentiality of e-mail and voicemail. However, this act does not have as broad of a sweep as it might appear from its name. Courts have held that home computers, business computers, and Internet service providers (ISPs) are not “electronic communications devices” that are covered by this act. So hacking into an e-mail account providerFTC v. Netscape Communications Corp., 196 F.R.D. 559, 560 (N.D. Cal. 2000). would be prohibited by this act, but not hacking into a home computerUnited States v. Steiger, 318 F.3d 1039, 1049 (11th Cir. 2003). or a business computer.United States v. Steiger, 318 F.3d 1039, 1049 (11th Cir. 2003). Due to the narrow reading of the statute by the courts, few prosecutions have occurred under this Act since its enactment.Computer Crime and Intellectual Property Section, United States Department of Justice, “Other Network Crime Statutes, Unlawful Access to Stored Communications, 18 U.S.C. §2701, 8. Historical Notes,” http://www.justice.gov/criminal/cybercrime/ccmanual/03ccma.html (accessed September 27, 2010).
Identity theft is also now codified into federal statute as a federal criminal violation.18 U.S.C. §1028(a)(7) and 18 U.S.C. §1028A. This crime is rampant. Identity thieves obtain credit in an otherwise creditworthy person’s name. The victim of these crimes can spend hundreds of hours repairing the damage. This is one of the primary reasons why it is very important not to reveal personal information on the Internet.
Finally, spamming is now subject to federal regulations, the violations of which are now a federal crime by virtue of the CAN-SPAM Act. This law serves as the vehicle to prosecute senders of large quantities of unsolicited e-mails if those e-mails do not meet the federal requirements.18 U.S.C. §1037. Marketers, beware!
Environmental crimes are actions that violate federal or state statutes relating to the environment, which carry criminal sanctions. The Environmental Protection Agency enforces federal environmental statutes, including those that carry a criminal penalty. Many corporations have been convicted of environmental crimes. For instance, corporations that illegally dump toxic substances into waterways, illegally harm endangered species or those species’ habitats, or trade in illegal substances that have been banned due to their propensity to cause great harm to the environment are all engaged in environmental crimes. U.S. federal environmental statutes that carry criminal penalties include the Clean Air Act; the Clean Water Act; the Resource Conservation and Recovery Act; the Comprehensive Environmental Response, Compensation, and Liability Act; and the Endangered Species Act. Additionally, state environmental law statutes frequently carry criminal penalties as well.
Recent examples of corporate convictions for environmental crimes can be found in Note 10.84 “Hyperlink: Federal Environmental Criminal Convictions”.
Hyperlink: Federal Environmental Criminal Convictions
Check out this link to explore recent environmental crime convictions. Corporate convictions are not uncommon. For example, the Tulip Corporation of New York was convicted for illegally storing lead contaminated materials without a permit. Penalties included a $100,000 fine and a $25,000 to Buffalo Niagara Riverkeepers.
In another case, Mar-Cone Appliance Part Co. was convicted of purchasing and selling ozone depleting refrigerant gas, which was illegally smuggled into the United States in violation of the Clean Air Act. The sentence included a five-year probation for the business, a half-million-dollar criminal fine, and a four-hundred-thousand-dollar payment to a nonprofit organization. The company distributed this illegal substance throughout the United States, which was an action condemned as undermining global environmental efforts to reduce ozone damage for personal gain.
Blue-collar crime is a generic term used to describe crimes that are not white-collar crimes. In business, property crimes (rather than person crimes) are a primary concern. A property crime is a crime involving damage to property, while a person crime is a crime involving the injury to a person’s body. Larceny is a major concern for many businesses. White-collar criminals are not the only ones who commit larceny. In retail, for instance, primary loss prevention concerns include shoplifting. Shoplifting is a serious and prevalent crime. Additionally, in any type of business, employee theft is a serious problem. Last, vandalism is unauthorized property damage, and any business with a physical presence can become the target of vandals.
Crime is a very important consideration in the business world. White-collar crimes are particularly insidious because white-collar criminals work from the inside, can be difficult to spot since they often hold positions of trust, and use deception as their primary tool. Blue-collar crimes also pose substantial risk of loss for businesses. Fraud, cybercrime, environmental crime, organized crime, and various forms of property crimes are all serious threats to businesses. Crime carries high personal costs not only to the individuals involved in the misconduct but also to society at large, including the corporations and others who depend on those corporations.
- Consider the video in Note 10.59 “Hyperlink: Too Good to Be True? Statistically Impossible Returns” concerning Harry Markopolos’s use of statistical modeling to identify Bernie Madoff’s Ponzi scheme. What role should statistical analysis and probability modeling have played in the regulatory environment that could have identified the Madoff Ponzi scheme disaster earlier?
- How can businesses protect themselves from embezzlement? What are some specific strategies that could be devised to ensure that bookkeepers or accountants do not skim money from the business?
- If you caught an employee stealing one dollar’s worth of office supplies, what would you do? What about twenty five dollars’ worth of supplies? One hundred dollars’? One thousand? Should employees be trained not to even take a pencil home? Would that type of training be worth the cost of the training itself?
- Check out Note 10.76 “Video Clip: Who Said Antitrust Is Boring? Not Hollywood!” to review some of the convictions against corporations. Are penalties payable to nonprofit environmental organizations appropriate penalties for corporate convictions for environmental crimes? Why or why not?