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WHITE COLLAR CRIME IN CONTEMPORARY SOCIETY 4TH ED.

CHAPTER 6

STATE-CORPORATE CRIME,

CRIMES OF GLOBALIZATION,

AND FINANCE CRIME

Trusted Criminals

Designed by: Jordan Land, M.S.

State-Corporate Crime

  • Much illegal governmental activity has connections with private enterprise

  • Many linkages exist among the “power elites”

  • State-corporate crimes are illegal or socially injurious actions that occur when one or more institution of political governance pursues a goal in direct cooperation with one or more institutions of economic production and distribution

State-Corporate Crime

  • A theory of state-corporate crime focuses on how state and corporate managers engage in cooperative endeavors that “result in death, injury, ill health, financial loss, and cultural destruction, all while being insulated from the full weight of criminalization for these actions”

  • This concept has been applied to industrial fires, nuclear weapons production, oil spills, treaty violations, and pre-emptive war

State-Corporate Crime

  • The U.S. government has been involved in the overthrowing of regimes in various countries around the world
  • Because transnational corporations have used their influence to promote such regime change when a government in some country has been viewed as threatening the interest of such corporations

  • Environmental crimes committed in conjunction with U.S. nuclear weapons production are a form of state-corporate crime because they are a collective product of interaction between a government agency and private corporations

State-Corporate Crime

  • State-corporate crime reflects the fulfillment of mutually agreed-on objectives of a public agency and a private entity achieved through cooperative illegal activity

  • The concept of state-corporate crime compels us to recognize that some major forms of organizational crime cannot be easily classified as either corporate or governmental and that these cross-organizational forms of crime may be especially potent and pernicious

Crime of Globalization

  • Sutherland’s classic White Collar Crime made little reference to illegal corporate or business activity of an international scope

  • If we accept the premise that we live in an increasingly globalized world, we must also focus on the global character of some white collar crime, as some criminologists recognize

Crime of Globalization

  • The anti-globalization movement contends that large-scale crimes are being carried out in the name of globalization

  • The U.S. was a strong supporter of the North American Free Trade Agreement in 1993

  • The U.S. has also promoted global free trade, but has been accused of causing harm to farmers, merchants, and consumers in many countries when it protects its own interests against free trade

Crime of Globalization

  • International financial institutions such as the International Monetary Fund and the World Bank are alleged to be complicit in major crimes against large numbers of people in developing countries
  • Crimes of globalization are consequences of policy decisions of high-level officials of major financial institutions and government agencies who are attempting to realize positive outcomes
  • Globalization refers to the dramatic compression of time and space across the globe

Crime of Globalization

  • Globalization contributes to an overall increase in economic inequality, fostering poverty and unemployment for many

  • It has been characterized as a new form of the ancient practice of colonization

  • Globalization clearly has many different dimensions

The Role of the World Bank in a Global Economy

  • The international financial institutions that play such a central role in contemporary globalization have become prime targets of criticism for their policies and practices
  • In a rapidly changing global economy, the roles of the international financial institutions have been increasingly questioned
  • These institutions have many ties with each other, and the lines of demarcation between their activities can become blurred

The World Bank and Crimes of Globalization

  • The World Bank has been characterized as paternalistic, secretive and counterproductive in terms of its claimed goals of improving people’s lives

  • Critics claim that many less-developed countries that received World Bank loans are worse off today in terms of poverty and that the severe austerity measures imposed on borrowing countries, deemed necessary to maximize the chances of bank loans being repaid, impact the poorest and most vulnerable citizens most heavily

The World Bank and Crimes of Globalization

  • At a World Bank meeting in Berlin in 1988, protesters called for the establishment of a Permanent People’s Tribunal to try the World Bank for “crimes against humanity”
  • The World Bank complicity in these allegations is best understood in terms of the Bank’s criminogenic structure and organization
  • The World Bank does not set out to do harm, but its mode of operation is intrinsically criminogenic and it functions undemocratically

The World Bank and Crimes of Globalization

  • The World Bank is at a minimum criminally negligent when it:

Fails to adequately explore or take into account the impact of its loans for major projects on indigenous peoples

Adopts and implements policies specifically at odds with the protocols of the UN Universal Declaration of Human Rights and subsequent covenants

Operates in a manner at least hypothetically at odds with both international law and state law

Finance Crime

  • Finance crime refers to large-scale illegality that occurs in the world of finance and financial institutions
  • Finance crime may be committed on behalf of major financial institutions, such as banks, or for the benefit of individuals occupying financially privileged statuses, such as investment bankers
  • In the final years of the first decade of the 21st century, the American economy and the world of high finance was in a state of crisis

Finance Crime

  • In the fall of 2008, the passage of a divided Congress “bailout” bill and the dramatic drops in the stock market, the financial crisis was widely characterized as the most serious since the Great Depression

  • This crisis occurred in the wake of several decades of high finance playing a central role in the production of vast wealth with deregulation, globalization, and technological innovation

Banking/Thrifts Crime:
The Savings & Loan Mess

  • The critical importance of banks to the economy and the catastrophic financial consequences of bank failures led to the creation of a large regulatory structure intended to oversee police banking operations

  • Banks from their earliest days have engaged in fraudulent activities
  • In 1999, a bank pleaded guilty to federal criminal charges in connection with shifting unclaimed checks and credits of customers into its own accounts

Banking/Thrifts Crime:
The Savings & Loan Mess

  • Some alleged practices involving credit cards do violate laws
  • In the recent past, the federal government filed antitrust charges against Visa and MasterCard for restricting banks from offering competitors’ cards
  • When people need loans, they often turn to banks
  • The largest loan most people will get is in connection with a purchase of a home or refinancing

Banking/Thrifts Crime:
The Savings & Loan Mess

  • Banks have also been implicated in a wide range of specifically illegal acts intended to enhance their profitability, including bribery, money laundering, tax evasion, and investment-related fraud

  • Money laundering has been described as the criminal practice of taking ill-gotten gains and moving them through a sequence of bank accounts so they look like legitimate profits from legal businesses

The S & L Frauds

  • Savings and Loan (S & L) was characterized at the time in the 1980s as the “biggest bank robbery” ever
  • The S & L failures can hardly be attributed to criminal conduct alone, but such conduct clearly played an important role
  • Beyond such immediate victims and long-term costs to taxpayers, the S & L frauds:
  • Added to the national deficit
  • Deflected billions of dollars that might have been spent on education, health care, and environmental projects
  • Limited credit available to legitimate borrowers who paid higher rates for loans

The S & L Frauds

  • In the 1970s, the rapid inflationary rise in the cost of living made the low, fixed interest rates paid by the

S & Ls increasingly unappealing to depositors and rendered the higher but still relatively modest interest earned on mortgages increasingly unprofitable

  • Thrifts deregulation took place over a period of time, culminating in the 1982 Garn-St. Germain Act
  • This new level of deposit insurance played a key role in bringing about the S & L debacle

The S & L Frauds

  • The various illegalities in the S & L frauds included:
  • Unlawful risk taking, looting and covering up
  • Unlawful risk taking refers to exceeding the practices legally available to the S & Ls, even in the deregulated 1980s
  • Deregulation produced a criminogenic environment that was bound to escalate the level of illegal activity
  • Finally, the S & Ls engaged in massive deceptions to conceal their fraudulent activities from outside examiners

Fraud and the S & L Bailout

  • In 1989, it was widely recognized that a massive bailout of the S & Ls was necessary

  • A new agency, the Resolution Trust Corporation, was established to sell the assets of hundreds of failed thrifts

The Criminal Justice Response to S & L Fraud

  • Investigating and successfully prosecuting S & L crimes proved difficult
  • The crimes were highly complex, and the line separating outright fraud from bad business judgment or mismanagement is not always well defined
  • Most of those convicted in S & L cases were minor players
  • In cases involving millions of dollars, only probation and modest fines were imposed

Insider Trading

  • Insider trading is a quintessential form of white collar crime

  • Violation of trust may be a principle attribute of all white collar crime, bust such violation virtually defines insider trading

  • Many other cases of insider trading involve individuals of more moderate means simply looking for a quick profit on an investment or to avoid losing money

Insider Trading

  • Individuals with privileged information have always made investment and trading decisions on the basis of such information

  • Prohibitions on insider trading originated principally with the advent of federal securities laws

  • Although no specific statutory definition of insider trading exists, SEC regulations and judicial opinions have generally defined it as trading on the basis of material nonpublic information

Insider Trading

  • The SEC has been granted much discretion in defining insider trading

  • Insider trading laws attempt to neutralize the advantages that violate either a basic trust or specific requirements for confidentiality

The Pursuit of Insider Trading Cases

  • Through most of the 20th century, the practice of passing inside tips was probably quite common and was not prosecuted
  • During the recent era, a number of factors increased the visibility and newsworthiness of insider trading
  • The financial markets became more vulnerable to insider trading by virtue of the dramatic growth in both the trading capacity of institutions and corporations and in tender offers or takeover situations

The Victims of Insider Trading

  • Clearly, the primary victims of insider trading are institutional and individual investors who bought or sold stock at a loss, failed to realize a profit, or overpaid for stock because of insider trader manipulations

  • The substantial direct losses of some investors are but a part of the cost of insider trading

  • The loss of confidence in the integrity of the market is another very real cost

The Wall Street Insider Trading
Cases of the 1980s

  • In 1985, Merrill Lynch claimed that one of its traders in Caracas was trading on inside information

  • This tip led to an SEC investigation of a small bank in the Bahamas, Bank Leu, through which the trades were executed

  • The investigation revealed that one of the bank’s clients had engaged in a pattern of exceedingly profitable trades correlated with corporate takeovers

The Michael Milken Case

  • Michael Milken became a key figure in the hyperinflated financial market of the 198os as the “Junk Bond King”
  • Milken had come to recognize that vast amounts of money could be raised through issuing and selling high-yield, high-risk junk bonds
  • They pay higher interest because they are viewed as more prone to default
  • These junk bonds were widely used to finance the wave of corporate takeovers during the 1980s and they were bought up by S & Ls and many mutual funds

The Michael Milken Case

  • Although the criminal investigation of Milken initially included charges of insider trading, it ultimately resulted in his pleading guilty to six felony charges of securities fraud and conspiracy

Insider Trading since the 1980s

  • Early in the 2000s, an especially high-profile case of alleged insider trading surfaced involving Dr. Sam Waksal of ImClone and his good friend Martha Stewart
  • Waksal was alleged to have tipped off a number of relatives and friends directly or indirectly that the FDA had failed to approve a major new ImClone drug for the market
  • When this news became public, the stock price plunged

Insider Trading since the 1980s

  • According to one study, politicians do suspiciously well as investors

  • The suspicion is that financiers with insider information are eager to ingratiate themselves with U.S. senators and other powerful politicians

Finance Crime and Financial Markets

  • In addition to insider trading, many other unethical and illegal activities occur within financial markets:
  • A massive check-kiting scheme against banks was masterminded by the prestigious brokerage firm, E.F. Hutton
  • They were systematically cheating customers by:
  • Phony bidding
  • A long-running fraud within a rigged foreign currency marketplace
  • The sale of illegal tax shelters
  • The revelation of significant fraud in the mutual fund and hedge fund industries

Finance Crime and Financial Markets

  • An immense amount of fraud occurs in connection with the sale of stocks, and some of this activity is addressed as a form of contrepreneurial fraud

  • Federal prosecutors also investigated possible systematic defrauding of large institutional investors in connection with the sale of limited real estate partnerships

  • Although such suits have been successful, it has generally been difficult to win such cases

Stock Analysts and Conflicts of Interest

  • Investors have historically relied upon advice and recommendation of stock analysts while making their investments
  • Stock analysts would often function as sales representatives promoting a company’s stock instead of as disinterested and impartial analysts
  • In return, the analysts who helped bring business to their firms are rewarded with huge bonuses
  • In some cases, stock analysts even own stock in companies whose stock they promote, and accordingly they profit greatly from a run-up in the stock price

Stock Analysts and Conflicts of Interest

  • Eliot Spitzer launched a criminal investigation of Wall Street firms after evidence surfaced that stock analysts who were recommending that their clients buy a stock were at the same time disparaging the companies involved and their stock in emails among themselves

  • Many stock analysts were complicit in huge losses for investors

Insurance Industry Fraud

  • People rely heavily on insurance as a buffer against catastrophic accidents, illnesses, and fatalities and as a source of retirement income

  • In fall 2008, insurance companies were being financially battered and undercapitalized

  • The offshore insurance companies have been especially successful in avoiding regulatory oversight and have been involved in large-scale frauds

Insurance Industry Fraud

  • Insurance company frauds take many forms
  • Ex. Brokers who are supposed to provide unbiased recommendations on coverage

  • The financial misrepresentations and manipulations of insurance companies put the interests of their clientele in jeopardy

Insurance Industry Fraud

  • As a consequence of the McCarran-Ferguson Act of 1945 and potent lobbying, the insurance industry has been relatively unregulated

  • Agents in these schemes misrepresent their credentials for providing financial advice, and are specifically trained to use scare tactics to persuade retirees to sign up for their plans