White-Collar Crime

White-collar crimes are illegal means of gaining financial benefits through camouflage, deception, or breach of trust. Characteristically they are organized and non-violent in nature. These criminals use their wealth and social status to conceal, deceive or violate the victims' trust.  

These crimes account for millions of dollars every year. In the 1930s, Edwin Hardin Sutherland coined this term. Sutherland was an American sociologist and criminologist. Bernard Ebbers, Ivan Boesky, Bernie Madoff, and Michael Milken are some of the High-profile individuals convicted of white-collar crimes.

• A white-collar crime is an unlawful act where people or organizations engage in non-violent offenses involving obscurement, betrayal, or breach of the victims' confidence.
• The most common offenses include money laundering, cybercrime, securities & commodities fraud, insider trading, financial information falsification, hedge fund fraud, and money laundering.
• These criminals are very successful in evading law enforcement. They are tough to spot and even harder to prove. Affluent criminals misuse their political influence to avoid legal consequences.

White-collar crimes are committed by individuals with a good social and economic standing. These criminals take undue financial advantage of an individual or business. Further, it can be seen as an act of deception, concealment, or the violation of a victim's trust. The non-violent nature of such organized crimes demarcates it from other violations of law.

In the 1930s Great Depression, Edwin Hardin Sutherland discovered the term "white-collar crime. Sutherland was an American sociologist and criminologist. Sutherland proposed his theory of differential association. Sutherland believed that crimes are not always caused by a lack of social learning, poverty, or other adverse conditions. Instead, he proved that perpetrators could be a person of respectability or high status as well.  

#1 - Enron Scandal

In December 2001, Enron announced its bankruptcy. Enron was an energy corporation. Enron engaged in misconducts like over-valuation of assets and exaggerating cash flows to hide its losses. They faked profits to dupe investors. Investors lost millions of dollars due to this planned crime. The scam was initiated by Andrew Fastow, Enron's chief financial officer.

The felony was investigated by FBI, IRS Crime Investigation Division, Department of Justice prosecutors, and SEC officials. Based on various evidence, 22 people were found guilty, including Enron's top brass. Officials seized $164 million.

#2 - WorldCom Inc.

WorldCom Inc. is one of the famous cases of white-collar crimes. WorldCom gaffer Bernard Ebbers was convicted of US's biggest corporate accounting conspiracy. The scam led to the company's bankruptcy in 2002. It was an $11 billion felony—Ebbers was sentenced to 25 years of imprisonment. The sentencing commenced in 2005. The company's internal audit team discovered improper accounting of expenses to the tune of $3.8 billion over five quarters. As a result, many lower-level employees were forced to report incorrect accounting records. This was an attempt to alleviate the company's financial position. 

The restatement of the accounts resulted in wiping off all the previously booked profits between Q1FY2001 and Q1FY2002. Upon discovery, WorldCom fired Scott Sullivan (CFO). Also, David Myers (Senior VP & Controller) was forced to resign.

#3 - Bernard Madoff

In 2009, Bernard Madoff, the former chairman of NASDAQ, was convicted of running a Ponzi Scheme. It cost investors around $65 billion.

Using the disguise of a wealth management scheme, Madoff raised funds from new investors to pay the former investors. Not a single penny of those funds was ever invested. Finally, in June 2009, Madoff was found guilty and was sentenced to 150 years of prison.

According to the Federal Bureau of Investigations (FBI), the following are the types of white-collar crimes:

1. Corporate Fraud: In most corporate frauds, the criminals resort to insider trading, forgery of financial information, or schemes that hide other frauds from the Securities and Exchange Commission (SEC) and other regulatory bodies.
2. Insider Trading: Corporate insiders misuse confidential data and official property to gain personal benefits. Sometimes, these criminals breach tax laws and regulations for personal gain.
3. Hedge Fund Fraud: Some traders time the market and discover ways to reap illegitimate benefits through late trading or faking the net asset value.
4. Falsifying Financial Information: The fraudsters come up with various accounting misrepresentations to present fake profits. They shield losses using manipulated financial records.
5. Securities and Commodities Fraud: It involves investment fraud, commodities fraud, market manipulation, broker embezzlement, and promissory note fraud. Such offenses are punishable under the Securities and Exchange Commission Act of 1934.
6. Embezzlement: The embezzler misuses the trust of the employer or third party to misappropriate funds. Typically, the embezzler siphons company funds into a personal bank account.
7. Money Laundering: It is a means of regulating undocumented cash or black money. It is associated with many other felonies like human trafficking, terrorism, corruption, health care frauds, and narcotics.
8. Bankruptcy Fraud: Bankruptcy is a type of relief offered to businesses that end up with an overwhelming amount of debt. In such cases, the creditors and lenders are left high and dry as they recover only a portion of the credit. Some fraudsters exploit the relief package by fraudulently filing for bankruptcy. They deliberately hide their assets.

White-collar criminals have a social or economic standing that they misuse. In contrast, a blue-collar crime is a minimal offense where offenders seek personal satisfaction or quick profit by engaging in misdemeanors like harassment, robbery, drug abuse, etc.

Unlike white-collar crimes, blue-collar crimes are usually carried out by people from lower social strata. As a result, white-collar criminals are harder to catch. In contrast, blue-collar crimes are often unplanned—easily spotted and punished.

Affluent offenders misuse their power and connections to protect themselves once they get caught. Characteristically such criminals impact a larger section of society. Most blue-collar criminals cause little damage.

White-collar criminals rarely use physical violence; this helps them evade the law for long. As a result, law enforcement does not treat the capture of white-collar criminals as a priority as other crimes endangering human lives are focused upon.

A large business cannot monitor the actions of every employee. However, the following measures can prevent crimes:

• Trace the Signs: Firms must check for the early indications of fraud or misrepresentation. It can be identified from the change in behavior. Various accounting flaws such as missing entries and manipulated records serve as evidence for fraud.
• Investigate the Data: Arranging frequent internal audits and examining the accounting records can help find the loopholes. Firms must take errors seriously—they could be an indication of a conspiracy.
• Strengthen the Reporting Mechanism: There should be a robust system for detecting and disclosing felonies within a firm. Managers and employees should be made aware of any fraud within the organization. Managers must closely observe the activities of their colleagues.
• Empower the Workforce: The middle and top-level executives must be educated on the various policies and techniques to identify crimes. In addition, they should be held accountable for the illegal activities of their team members.

Most white-collar criminals don't get caught, thanks to strong political and social connections. Instead, law enforcement relies on whistle-blowers who report frauds, bribes, thefts, and corruption.

In the US, the Federal Bureau of Investigation (FBI), the Securities and Exchange Commission (SEC), and the Internal Revenue Service (IRS) set up the following penalties for the criminals:

• Home Detention
• Fines
• Restitution
• Forfeitures
• Community Confinement
• Supervised Release
• Paying Prosecution Cost
• Imprisonment

The federal government has the authority to check financial crimes under the US Constitution and Commerce Clause. The state and federal authorities collect evidence, investigate, and prove the offenders guilty.

This has been a guide to what is White-Collar Crime & its Definition. Here we explain how white-collar crimes work along with their types, examples, punishment. You can learn more about from the following articles -

• Accounting Scandals
• Corporate Governance
• Cook the Books
• Window Dressing in Accounting