Video Case Study

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6-5 White-Collar Crime For many people, the terms crime and criminal tend to evoke thoughts of rape, arson, armed robbery, or murder. These violent crimes are devastating, but they are no less destructive than crimes perpetrated every year by nonviolent business criminals. So-called white-collar crime (WCC) (Crimes perpetrated every year by nonviolent business criminals) does more damage in monetary and emotional loss in one year than violent crimes do over several years combined.

White-collar criminals tend to be highly educated people in positions of power, trust, respectability, and responsibility within a business or organization. They commit illegal acts for personal and/or organizational gains by abusing the trust and authority normally associated with their positions. The victims of WCC are often trusting consumers who believe businesses are legitimate.

At first glance, deciding what constitutes a white-collar crime seems fairly simple. According to the U.S. Department of Justice, a WCC is a “nonviolent criminal act involving deceit, concealment, subterfuge and other fraudulent activity.” The corporate executive who manipulates the stock market, the tax cheat, or the doctor who falsely bills Medicaid are all obvious white-collar criminals. But a government official who accepts illegal payments is also a white-collar criminal, and guilty of official corruption. Additionally, a corporate executive who approves the illegal disposal of toxic waste is a white-collar criminal guilty of violating environmental regulations.

Online white-collar crime is a growing problem around the world. Because many companies rely on advanced technology systems, anyone with the ability to hack into a system can access the highly sensitive information necessary to commit WCC. Cybercrime, such as identity theft and online fraud, is a major concern of the Federal Trade Commission. Ransomware uses software to encrypt critical data and demands a ransom in exchange for decrypting the files. Table 6-4 provides a list of most typical internet crimes.

Table 6-4

Top Reported Internet Crimes

1. Computer system attacks (ransomware)

2. Malware: [Viruses]: Programs designed to spread like wildfire and cause damage to systems; [Spyware]: Software that’s built to spy on your

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activities; [Bots]: Automated sources designed to perform unwanted tasks, often repeatedly.

3. Phishing: Third parties aim to trick individuals into giving out sensitive information, typically by using a bait-and-switch method.

4. Identity theft

5. Social engineering: A criminal posing as a network supervisor contacts someone [accounting department] and requests login and password information to restricted systems.

6. Web-based and denial-of-service attacks: Multiple systems flood the bandwidth or resources of a targeted system, (more than one web server) resulting in multiple compromised systems (for example, a botnet) flooding the targeted system with traffic.

Source: Scott Steinberg, “6 Most Common Types of Cybercrimes Business Leaders Should Understand,”

Mobile Business Insights, November 18, 2016, http://mobilebusinessinsights.com/2016/11/6-most-

common-types-of-cybercrimes-business-leaders-should-understand/ (accessed April 16, 2017).

White-collar crime is a major problem in the financial world. For instance, eleven fraudsters got together to create a $40 million Ponzi scheme. The mastermind behind the scheme, Keith Franklin Simmons, developed what looked like a hedge fund dealing in foreign currencies. With help he recruited many individuals who had insurance experience as regional managers, who in turn recruited friends and former clients to invest with the fraudulent fund. Many investors were elderly and therefore more vulnerable. None of the money was actually invested. Keith Franklin Simmons was sentenced to 40 years in prison.

Another case of white-collar crime also involves a well-known financier. Matthew Martoma, a portfolio manager for SAC Capital Advisors hedge fund firm, was sentenced to nine years in prison for insider trading—one of the longest insider trading prison sentences levied so far. Martoma was accused of gaining nonpublic insider information and trading on the information to make SAC Capital $200 million in illicit profits and $9 million in bonuses for himself. While many in business feel such stiff sentences are excessive due to the permanent damage done to reputations and that these are nonviolent crimes, others argue that being robbed at gunpoint is less devastating than working and saving for a life time only to discover the sacrifices made were meaningless.

As Table 6-5 indicates, these top 10 types of fraud are often associated with individuals that engage in WCC. While we are focusing on individuals, WCC is often associated with corruption with a number of individuals working together to engage in fraud. Many individuals that develop a scheme draw employees or others into helping develop and implement the fraud. Often lower level employees are given a minor role and may not be

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aware of their assistance in the fraud. There are also corrupt organizational cultures where employees have to participate in a known fraud to keep their job.

Table 6-5

Top Ten Types of Fraud

Category No. of Complaints

Debt Collection 859,090

Identity Theft 399,225

Impostor Scams 406,578

Telephone and Mobile Services 292,155

Prizes, Sweepstakes and Lotteries 141,643

Banks and Lenders 143,987

At Home/Catalog Sales 109,831

Auto-Related 94,673

TV & Electronic Media 49,546

Credit Reports/Internet 49,678

Total 2,546,406

Source: Federal Trade Commission, Consumer Sentinel Network Datab Book, March 2017,

https://www.ftc.gov/system/files/documents/reports/consumer-sentinel-network-data-book-january-

december-2016/csn_cy-2016_data_book.pdf (accessed April 16, 2017).

In response to the surge in white-collar crime, the U.S. government stepped up efforts to combat it. The government is concerned about the destabilizing effect WCC has on U.S. households and the economy in general. The government can charge individuals and corporations for WCC offenses. The penalties include fines, home detention, paying for the cost of prosecution, forfeitures, and prison time. However, sanctions are often reduced if the defendant takes responsibility for the crime and assists the authorities in their investigation. Many people do not feel the government is devoting enough resources to combat WCC. Others believe that no matter how many regulations and controls the government puts in place, there will always be rogue individuals who will find loopholes. It is therefore necessary for companies to implement their own controls to combat fraud and other types of white-collar crime. Capital One, for instance, employs certified fraud examiners that examine questionable activities and file Suspicious Activity Reports if it seems like fraud might be occurring. Because white-collar crime is constantly adapting, fraud examiners must

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be willing to share knowledge and experiences to remain current on fraud schemes likely to impact their businesses.

Why do individuals commit white-collar crimes? Advocates of the organizational deviance perspective argue that a corporation is a living, breathing organism that can collectively become deviant. When companies have lives separate and distinct from biological persons, the corporate culture of the company transcends the individuals who occupy these positions. With time, patterns of activities become institutionalized within the organization, and these patterns sometimes encourage unethical behaviors.

Another common cause of WCC is the views and behaviors of an individual’s acquaintances within an organization. Employees, at least in part, self-select the people with whom they associate within an organization. For companies with a high number of ethical or unethical employees, people who are undecided about their behavior (about 40 percent of businesspeople) are more likely go along with their coworkers.

Additionally, the incidence of WCCs tends to increase in the years following economic recessions. When companies downsize, the stressful business climate may anger some employees and force others to act out of desperation. Furthermore, as businesses begin to expand and grow, fraudsters find gaps in corporate processes and exploit growth opportunities.

Finally, as with criminals in the general population, there is the possibility some businesspeople may have inherently criminal personalities. Corporate psychopaths, or managers who are nonviolent, selfish, and remorseless, exist in many large corporations. Corporate psychopaths may be more likely to use moral disengagement, in which they reframe the individuals or actions of a particular situation to convince themselves certain ethical standards do not apply. Employees of corporate psychopaths are less likely to believe that their organization is socially responsible, the organization shows commitment to employees, or they receive recognition for their work. Some organizations use personality tests to predict behavior, but such tests presuppose individual values and philosophies are constant; therefore, they seem to be ineffective in understanding the motivations of white-collar criminals.

Debate Issue: Take a Stand

Why Do People Engage in White-Collar Crime?

White-collar crime occurs when highly trusted and educated individuals commit criminal misconduct. Two examples of white-collar criminals are Bernard Madoff, who developed one of the largest Ponzi schemes ever, and R. Allen Stanford, who developed an $8 billion certificate of deposit program promising unrealistically high interest rates. Different theories exist why individuals become white-collar criminals. Research shows 1 percent of business executives may be corporate psychopaths with a predisposition to lie, cheat, and take any other measures necessary to come out ahead. This possibility may account for the fact that many white-collar criminals

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become entrepreneurs, thus putting themselves in a position to control others. This theory might account for rogue individuals such as Bernard Madoff.

Many believe white-collar crime evolves when corporate cultures do not have effective oversight and control over individuals’ behavior. Such toxic organizational cultures occur when unethical activities are overlooked or even encouraged. For instance, many employees engaged in liar loans at Countrywide Financial because they received rewards for bringing in additional profits. It seems unlikely they all had psychological maladies.

1. White-collar criminals tend to have psychological disorders that encourage misconduct as a route to success.

2. White-collar crime occurs as a result of organizational cultures that do not effectively control organizational behavior.

The reasons for the increases in WCC are not easy to pinpoint because many variables may cause good people to make bad decisions. Businesspeople must make a profit on revenue to exist, a fact that slants their orientation toward teleology and creates a culture in which white-collar crimes can become normalized. Table 6-6 lists top justifications given by perpetrators of white-collar crimes. The Federal Sentencing Guidelines for Organizations state that all organizations should develop effective ethics and compliance programs as well as internal controls to prevent WCC.

Table 6-6

Common Justifications for White-Collar Crime

1. Denial of responsibility. (Everyone can, with varying degrees of plausibility, point the finger at someone else.)

2. Denial of injury. (White-collar criminals often never meet or interact with those who are harmed by their actions.)

3. Denial of the victim. (The offender is playing tit-for-tat and claims to be responding to a prior offense inflicted by the supposed victim.)

4. Condemnation of the condemners. (Executives dispute the legitimacy of the laws under which they are charged, or impugn the motives of the prosecutors who enforce them.)

5. Appeal to a higher authority. (“l did it for my family” remains a popular excuse.)

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6. Everyone else is doing it. (Because of the highly competitive marketplace, certain pressures exist to perform that may drive people to break the law.)

7. Entitlement. (Criminals simply deny the authority of the laws they have broken.)

Source: Based on Daniel J. Curran and Claire M. Renzetti, Theories of Crime (Needham Heights, MA:

Allyn & Bacon, 1994).