Homework
Chapter 8 Business Crime
Its Legal, Ethical, and Global Environment
Marianne M. Jennings
Business
11th Ed.
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What Is Business Crime?
Corporate Crime, Also Called “White Collar Crime”
Includes Medicare Fraud
Public Corruption Crimes
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The Crimes Within a Corporation
Financial fraud: manipulating earnings
Occurs when managers feel pressures to meet earnings goals
Enron and Andrew Fastow
Forensic accounting (“the most secure job in America”)
What Is Business Crime?
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The Crimes Corporations Commit
Marketing missteps
Pharmaceutical industry and the failure to comply with FDA regulations on sales
The Crimes Employees Commit
Embezzlement
Internal controls issues
What Is Business Crime?
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The Intercorporation Crimes
Kickbacks
Antitrust violations
Securities fraud
Obstruction
What Is Business Crime?
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Liability for Crimes
Officers and Directors are Liable
If they authorized the conduct, or
If they knew about the conduct and did nothing
Case 8.1 United States v. Park (1975)
What standard of liability did the instruction given by the judge impose?
Is Mr. Park guilty of a criminal violation?
What does this case say about a manager’s responsibility?
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Federal Laws
Boesky and Milken: The Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA)
Savings and Loan Crisis: The “white-collar kingpin” law
Enron et al.: Sarbanes-Oxley
Sarbanes-Oxley Act (2002)
Criminal penalties increased
Personal accountability enhanced
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Federal Laws
White-Collar Kingpin Act
Federal Law imposes minimum federal mandatory sentences on corporate officers
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Federal Laws
Honest Services Fraud
Action by an officer that deprives the shareholders of that officer’s honest services
Following Skilling v. U.S., require proof of bribery, conflicts, or corruption to be a charge for a corporate officer
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Federal Laws
Dodd-Frank – Wall Street Reform and Consumer Protection Act
Creates a Consumer Financial Services Bureau
Mortgage lenders, brokers, investment bankers, insurers, and investment firms are covered by provisions in this law
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Other Business Crimes
OSHA Rules
Failure to comply with safety laws
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Penalties for Business Crime
ACT
Internal Revenue Code
26 U.S.C. § 7201
Sherman Act (antitrust)
15 U.S.C. § 1
Sarbanes-Oxley
15 U.S.C. §1512
(document destruction, concealment, alteration, mutilation during pending civil or criminal investigation)
PENALTIES
$100,000 ($500,000 for corporations) and/or 5 years
For evasion (plus costs of prosecution as well as penalties and assessments: 5-50%)
$350,000 and/or 3 years
$10,000,000 for corporations
Injunctions
Divestiture
20 years plus fines
(25 years for perjury)
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Penalties for Business Crime
Sarbanes-Oxley
(certification of financial statements)
1933 Securities Act
15 U.S.C. § 77x (as amended by Sarbanes-Oxley)
Securities and Exchange Act of 1934
15 U.S.C. § 78ff
Clean Air Act
42 U.S.C. § 7413
$1,000,000 and/or 10 years
If willful: $5,000,000 and 20 years
Officers who earn bonuses based on falsified financial statements must forfeit them
$100,000 and/or 10 years
$5,000,000 and/or 20 years
$25,000,000 for corporations
Civil penalties in addition of up to three times profit made or $1,000,000, whichever is greater
$1,000,000 and/or 5 years
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Penalties for Business Crime
Clean Water Act
33 U.S.C. § 1319
Occupational Health Safety Act
29 U.S.C. § 666
Consumer Product Safety Act
15 U.S.C. § 2070
For negligent violations: $25,000/day and/or 1 year
For knowing violations: $50,000/day and/or 3 years
For second violations: $100,000/day and/or 6 years
For false statements in reports, plans, or records: $10,000/day and/or 2 years
Willful violation causing death: $70,000 and/or 1 year; minimum of $5,000 per willful violation
Giving advance notice of inspection: $1,000 and/or 6 months
False statements or representations: $10,000 and/or 6 months
$50,000 and/or 1 year
Tampering: up to $500,000 and/or 10 years
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Penalties
Corporate Integrity Agreements (CIA)
Presence of monitors
Criminal indictments of corporations for common law crimes
Shame Punishment
Community Service
Designated Felon
Officer and Executive Banishment
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Penalties
Deferred Prosecution Agreements
Responsible Corporate Officer (health care field)
New and higher penalties: Percentage of profits fine
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Penalties
Federal Sentencing Guidelines
A type of mandatory sentence regulation
When certain elements are present, there must be prison time
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Penalties
Corporate Sentencing Guidelines
Developed by U.S. Sentencing Commission
Sentences for officers increase if crime prevention methods are not in place at the corporation
Avoiding penalties
Written crime prevention program
Officers assigned responsibility for enforcement
Screen employees
Training programs and written materials
Prevention and detection of crime processes
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Much More Than Compliance
Businesses that do the following have reduced sentences under the guidelines:
Have a code of ethics in place
Conduct training on the code of ethics
Have a company hot line and ombudsperson for employees to utilize anonymously in reporting violations
Protect employees who report violations
Investigate all allegations regardless of their sources
Report all violations immediately and voluntarily
Offer restitution to affected parties
Cooperate and negotiate with regulators
Admit your mistakes and shortcomings
Be forthright and public with your code of ethics
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Corporate Board Responsibility
Directors can be held personally liable for fraud
Must show responsibility for management of the compliance program
Also possible personal liability to shareholders for fraud
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Business Crime Elements
Mens Rea, Scienter, or Criminal Intent
State of mind required to commit a crime
For corporations − prove intention on behalf of directors
To prosecute, must show individual intent
Can establish by showing their knowledge of actions and failure to object
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Business Crime Elements
Case 8.2 People v. M & H Used Auto Parts & Cars, Inc. (2005)
What is the difference between knowledge of the law and knowledge of the conduct?
What knowledge did the state prove the defendants had?
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Business Crime Elements
Mens rea, Conscious Avoidance, and Corporate Officers
Liability cannot be avoided by distancing themselves from the preparation of financial statements
Communication and contact with those who prepare the statements is sufficient to establish knowledge
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Business Crime Elements
Actus Reus − The Act of the Crime
Intent alone is not a crime; the act must be committed
The required conduct described for each crime
Sometimes a failure to act may constitute a crime − for example, failure to pay taxes
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Theft
Intent to take property
Actual taking of property for permanent use
No authorization to take the property
Embezzlement
Intent to take property
Actual taking of property for use, temporary use is still crime
By person entrusted with property
Examples of Crimes
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Examples of Crimes
Obstruction of Justice
Intent to impede, obstruct, or influence investigation
Auditors must retain work papers for five years
Felony − 10 years
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Internet Crime
Unauthorized Access to Computer Crimes
Electronic Communications Privacy Act
Stored Communications Act
Case 8.3 New Jersey v. Riley (2009)
– What was the type of misuse?
– Why does the court have concerns about applying criminal statutes to workplace excesses on computer use?
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Internet Crime
Unauthorized Use of Computer Resources
Economic Espionage Act: Use, downloading, copying, duplicating, uploading, transmitting trade secrets
Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM)
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Criminal Fraud
Obtaining money, goods, services, or property through false on misleading statements
Requires intent to defraud
Counterfeit Access Device and Computer Fraud and Abuse Act
Examples of Crimes
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Internet Crime
Cyberbullying, Cyberstalking, and Privacy
State and federal regulation
Statutory definitions of conduct for criminal prosecution
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Internet Crime
Copyright Crimes Online (Chapter 15)
Drug dealing and pornography are still crimes online
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Other Crimes
Criminal fraud
Commercial Bribery
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RICO
Pattern of racketeering activity
Must have at least two consecutive violations
Offenses that qualify as predicate offenses include pornography, murder, kidnapping, bribery, extortion, fraud, etc.
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USA Patriot Act
Business Crimes and USA Patriot Act
Prior to 2001: Money Laundering Control Act
Post 2001: USA Patriot Act amended Money Laundering Control Act and Bank Secrecy Act
Cannot contract with terrorist groups or funnel cash to them for services (Chiquita Consider)
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Additional Crimes
OSHA violations
Antitrust violations
Consumer Product Safety violations
State crimes
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Procedural Rights
Fourth Amendment Rights
Privacy amendment
Search warrant procedures
Must be based on probable cause
Must be issued by a disinterested magistrate
If searches are done improperly, evidence is inadmissible at trial
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Fourth Amendment Rights
Exceptions to warrant requirement
Records are being destroyed
“Plain view” exception
Warrants and Technology: Texts, E-Mails, and ISPs
Case 8.4 U.S. v. King (2007)
Is there a reasonable expectation of privacy in a shared drive?
Procedural Rights
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Procedural Rights
Records in possession of a third party
Can recover them
Third party cannot assert Fourth Amendment rights − must be record owners
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Procedural Rights
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Privileged Documents and the Fourth Amendment
Notes on trial strategy, audit procedures, and communications between lawyers and clients are protected
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Fifth Amendment Rights
Protection against self-incrimination
Given to natural persons − not to corporations
Corporate officers can assert it to protect themselves but not corporate records
Procedural Rights
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Fifth Amendment Rights
Miranda warnings
Given when individual is in “custody”
“Custody” means inability to leave − not necessarily jail
Right to attorney; right to silence − notice of evidentiary use of statements
No coaxing of confessions prior to warnings
Procedural Rights
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Criminal Proceedings
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Due Process Protections of Fifth Amendment
Warrant or warrantless arrest begins process
Warrant − you have committed crime and they look for you
Warrantless − you are arrested at the scene
Initial appearance
Required within short period (24 hours)
Charges explained
Bail terms set; amount; or released on own recognizance
Procedural Rights
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Due Process Protections of Fifth Amendment
Preliminary hearing or grand jury
Hearing − information issued; defendant is present and can cross-examine witnesses
Grand jury − indictment; secret proceedings
Arraignment
Plea is entered
Trial date is set
Procedural Rights
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Due Process Protections of Fifth Amendment
Discovery: Mandatory disclosure of witnesses and evidence
Pretrial conference: Try to settle some issues if possible
Omnibus hearing: Challenge evidence admissibility
Trial
Appeal
Procedural Rights
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