Crime and Fraud
CRIME AND FRAUD
Both individuals and businesses commit many criminal activities that cost businesses, consumers, government agencies, and stockholders considerable sums of money each year. Business crime is not new; in fact, fraudulent activities have been a common part of business operations for thousands of years. For instance, in 360 b.c.e. in Syracuse, Sicily (then a Greek colony), Xenothemis and a ship owner, Hegestratos, persuaded a customer to advance cash by claiming that a vessel was fully laden with corn. Maritime trade was at that time very risky, and many vessels were subsequently lost at sea. Hegestratos intended to exploit this risk of loss at sea three days after the ship sailed from port by sinking it. When the other passengers discovered Hegestratos's plot, he panicked, jumped overboard, and drowned. This early example illustrates that criminal, and especially fraudulent, activities have existed within the world of business for some time and, unfortunately, will probably continue to do so.
Under modern law, for a crime to have occurred, an illegal act must have been committed and intent to commit the act must be shown. A crime is a violation of local, state, federal, or international law and is punishable by the appropriate government authority. Criminal activities are usually defined as applying to a specific type of behavior or action. Criminal activities can be committed by individuals against a business as well as by businesses through the actions of their employees against consumers, the general public, and/or stockholders. Statistics regarding a variety of crimes committed in the United States can be found on the Federal Bureau of Investigation's Web site (http://www.fbi.gov).
CRIMES COMMITTED BY INDIVIDUALS AGAINST BUSINESSES
Business-related individual criminal activities are normally broken down into two categories: internal and external.
Internal crime occurs when an employee steals from or commits some other offense against the business. For example, depending on their jobs, employees may have access to business files, records, or sensitive financial information. The dishonest employee could then use this information to commit a crime against the business. Generally, the higher in the business the employee, the greater the potential for serious criminal activities against the firm.
A number of internal crimes are frequently committed against a business. Among the most common are abuse of power, embezzlement, misuse of business time, computer and electronic information manipulation, intellectual property theft, supply and equipment pilferage, travel expense abuse, and vandalism and sabotage.
Abuse of power
Making inappropriate financial decisions on behalf of the business that are really intended to benefit the employee is one form of employee criminal activity. An example of this may be seen when an employee is empowered to sign purchase contracts on behalf of the employer with the objective of getting the lowest price available from outside vendors. Instead of doing this, an employee could sign contracts with more expensive outside vendors and receive a kickback in return. Acceptance of kickbacks is an abuse of power and, depending on the size of the contracts, may cost a business a considerable amount of money.
One of the most common internal criminal activities is the manipulating of accounting records to steal business funds. Employees who are well trained in accounting techniques may be able to devise sophisticated schemes to cover their connection to the stolen business funds. Such criminal accounting violations can go on for years and end up costing a business many thousands of dollars. These criminal accounting practices can be detected through a variety of methods, such as changes in accounting procedures, coworker concerns, and regular internal and/or external audits. Examples of embezzlement warning signs may be viewed on the FindLaw for Small Business Web site (http://smallbusiness.findlaw.com/business-operations/accounting/accountingembezzlement-signs.html).
Accounting crimes are very serious matters that have adverse consequences for a business. The stealing of funds hurts the business's profit margin and, in turn, stockholders. Stock value is harmed because of the reduced profits showing on the books, which, in turn, can cost a business the lost value of its securities. Such internal accounting crimes must be reported to the appropriate law enforcement agencies, making the embezzlement part of the business's public record. Thus the business faces the embarrassment associated with having been a victim of accounting crimes, possibly weakening its image and public confidence in it. An employee who gets caught committing such crimes faces severe penalties if convicted. Depending on the amount of funds stolen, an employee could be charged with and convicted of a felony and face a long prison sentence. In addition, once convicted of such a crime, it will be next to impossible for a person to get another job in the business world.
Misuse of business time
Employees who perform non-work-related functions while at work are involved in fraudulent activities because they are getting paid to do work for the business but in reality are not performing those functions. An example of this practice is an employee who surfs the Internet for several hours a day for personal reasons, depriving the business of employee production during that time. A few hours of lost time here and there may not seem like much to an employee, but the aggregate loss of work time in the business as a whole can add up to a sizable loss. The misuse of business time by employees surfing the Internet is has become known as cyberslacking. For more information about cyberslacking and its potential impact on business, see the bCentral Web site (http://www.bcentral.co.uk/newsletters/bulletins/cyberslacking.mspx).
Computer and electronic information manipulation
The advent of modern technology has provided more opportunities for employees to commit computer or electronic fraud. One of the most common forms of embezzlement involves the electronic manipulation of business funds so as to deposit them into personal or other thirdparty accounts. Once the rerouted business funds are deposited into such an account, the employee may withdraw them and spend them at will. Initially, such electronic fraud might seem easy to carry out, but computers leave behind clues that will lead auditors to the final destination of the funds and to the dishonest employee. For more information regarding the use of computers in criminal activity, see an article available on the Web site of the company Natural Security Institute (http://nsi.org/Library/Compsec/crimecom.html).
Intellectual property theft
One of the fastest-growing areas of business-related criminal activity is the theft of cutting-edge technology by workers from their employers. Typically, dishonest employees will sell the stolen technological knowledge to a competing firm. Criminal activity in this area can be extremely damaging to any business. One reason is that most businesses invest considerable sums of money in research and development to improve or create new technology. The theft and resale of this information to competitors could easily cost a business many thousands of dollars in lost profits. Another is that the business's competitors can stay competitive for only a fraction of the price and thus reap even larger profits. In response to this serious issue, businesses have tightened security and have asked law enforcement to vigorously prosecute anyone involved with this type of criminal behavior. Statistics regarding intellectual property theft can be found at the U.S. Department of Justice's Office of Justice Programs Web site (http://www.ojp.usdoj.gov/bjs/abstract/ipt02.htm).
Supply and equipment pilferage
Another example of internal employee criminal activity is the theft of business supplies and office equipment. Businesses are concerned with employees who steal supplies and office equipment, such as laptop computers, paper, paper clips, pens, printers, and so forth. The theft of such business property reduces business profits and, if its stock is publicly traded, earnings for its stockholders. The consequences for dis-honest employees who are caught engaging in these activities include job termination and criminal prosecution. For more information about preventing employee pilferage, see the National Federation of Independent Business Web site (http://www.nfib.com/object/3289337.html).
Travel expense abuse
Employees who travel for a business as part of their jobs may commit fraud by putting personal items on the firm's expense account. For example, employees may include higher amounts on their expense voucher than were actually paid. This practice is common when reporting the amount paid in the form of a tip, as usually no receipt is involved. Individually, the funds embezzled by one employee in this way might not add up to much, but collectively this type of crime could cost a business many thousands of dollars each year.
Vandalism and sabotage
Another type of internal crime is an employee's intentional destruction of business property or equipment. The employee does not receive any monetary benefit from destroying business property; rather, it is done to get back at a business or a supervisor for a myriad of reasons, such as being passed over for promotion, a pending layoff, or a poor performance evaluation. Traditional employee vandalism involves destruction of physical property, including computer equipment, office furniture, business vehicles, or other business property. Physical destruction of business property can be deterred by the use of surveillance equipment and the visible presence of adequate security staff. For more information on preventing vandalism see the Boulder, Colorado, Police Department Web site (http://www.ci.boulder.co. us/police).
A real threat to modern businesses is efforts to sabotage computer systems. An employee with extensive knowledge of a business's computer system could create a computer virus or some other highly technical method to incapacitate some or all of the business's computer system. The destruction or failure of a business's computer system would cause enormous trouble for the business. In addition, if business files were to be damaged or erased, it could cost the business a considerable amount of time and resources to fix them, not to mention the lost sales or poor customer service that might occur as a result. Since the computer security issue is so important, businesses normally discontinue computer access for employees who are going to be separated from the firm. In addition, business security typically monitors employees who have exhibited strong negative feelings toward the business or a supervisor.
Among the more common external crimes committed against a business are burglary, robbery, shoplifting, and walk-in office/factory thefts.
Burglary is usually thought of as breaking into a building with the intent of committing a felony, or, in particular, stealing something. Although any business may be burglarized, individuals who commit burglary tend to target those firms where they are likely to receive a high monetary return for their efforts. Financial institutions, such as banks, are often targeted because they normally have large amounts of cash or valuable securities on hand. Almost every major financial business uses a variety of elaborate antiburglary devices to deter potential burglaries. Financial institutions also use extensive networks of electronic equipment to notify law enforcement when burglaries do occur. Most major businesses now employ a wide variety of antiburglary strategies in order to provide maximum security to their offices and employees. For further information on burglary prevention strategies, see the Los Angeles, California, Police Department Web site (http://www.lapdonline.org).
Robbery is committed when a criminal uses force or the threat of force—usually with a weapon, such as a gun or knife—to steal from a business during its normal operating hours. Robberies are very serious because of their potential for bodily injury of employees and/or customers who are on the premises at the time the robbery is committed. Moreover, any property or money that is stolen also hurts the business from a profit-and-loss point of view. For further information on robbery prevention strategies, see the Colorado Association of Robbery Investigators Web site (http://www.co-asnrob.org/Default.htm).
One of the most prominent threats to any retail business is shoplifting, which costs businesses millions of dollars in lost sales and stolen merchandise each year. Unfortunately, the cost associated with this type of criminal activity is passed on to honest consumers in the form of higher prices. Because of the high costs associated with shoplifting, many retail businesses use sophisticated electronic surveillance systems in order to deter shoplifting and to catch those who commit the crime. Most retailers have adopted a zero-tolerance policy relative to shoplifting and will prosecute anyone caught stealing regardless of the amount. The combination of strong antitheft measures and vigorous prosecution of those caught has resulted in fewer numbers of shoplifting cases. For further information on shoplifting prevention, see the Web sites for the National Association for Shoplifting Prevention (http://www.shopliftingprevention.org/main.asp) and the Seattle, Washington, Police Department (http://www.ci.seattle.wa.us/police/default.htm).
Walk-in office/factory thefts
Some individuals commit thefts simply by walking into an office and stealing something of value. The criminal then walks out of the office or factory with the item and tries to resell the product. Individuals who commit such crimes often try to look as if they belong there (such as a delivery person) in order to get past business security and to not look suspicious to the employees.
CRIMES COMMITTED BY BUSINESSES
Occasionally, businesses are sources of crime against consumers, the general public, government, and/or stockholders. Examples of crimes committed by businesses include fraudulent reporting, price fixing, and product misrepresentation.
A business might partake in fraudulent activities by manipulating or misrepresenting business accounting records, profit information, sales data, or other pertinent financial information. This type of behavior is usually an attempt to hide serious financial problems in order to prevent the general public, regulatory agencies, or stockholders from getting poor status reports. Unfavorable financial information can be devastating to a business's stock value, which, in turn, will likely cause the business to lose a considerable amount of money in business equity. For example, business X might intentionally misreport higher profits than were actually accrued to maintain the stock price and value of the business. If the actual lower profits had been reported, then the stock would almost surely go down, causing a decrease in the value of the business.
Another reason a business might report inaccurate financial data is because most corporate officers have some form of stock options, and a serious drop in the stock price might be very costly on a personal basis. This type of fraud is usually carried out at the top levels of the business. When this type of crime is committed by a business through its officers, serious consequences accrue to both. Once the crime is uncovered, regulatory and law enforcement agencies at both the federal and state levels may begin an investigation of the alleged fraudulent activities. If the criminal activities are substantiated and convictions occur, the business, at a minimum, faces large fines, while the officers face long prison terms. In addition, the business faces a humiliating defeat in the arena of public opinion that will, in turn, hurt future sales.
Businesses may engage in another type of crime known as "price fixing," or conspiring with competitors to charge a minimum price for their products. This practice forces consumers to pay more for a particular product than would be charged in a "nonprice-fixing" competitive environment. Businesses are rewarded with higher profit margins because this practice does not force them to conform to market forces. Price fixing is a violation of the Sherman Antitrust Act of 1890, which was passed to ensure that a competitive free market exists, allowing for competitive pricing. The Federal Trade Commission and the U.S. Department of Justice have primary jurisdiction over businesses that engage in violations of the Sherman Antitrust Act. When a business and its officers are prosecuted for price fixing, the business often faces large fines while individual officers usually go to prison.
When a business knowingly produces a defective or substandard product and sells it to the public anyway, the firm has committed product fraud. Product fraud is extremely serious because consumers depend on safe products in every aspect of daily life. Defective or unsafe products can cause serious harm to both the individual consumer and the general public. An example of product fraud would be when an automobile manufacturer produces and markets a vehicle that has shown, in presale trials, to be unsafe. For instance, a vehicle may be unsafe when hit from behind or from the side, causing the gas tank to explode because of design flaws. The obvious results of such flaws in vehicle design are the severe injury and/or death of people. Naturally, responses to product fraud include numerous lawsuits and lack of public trust in businesses that knowingly release defective or poorly designed products.
Business-related criminal activity is not new. Crimes in business, such as fraud, can be traced back thousands of years. Crimes can be committed both by and against a business. Common crimes that influence the health of businesses and their customers include burglary, embezzlement, fraud, robbery, and shoplifting. Since crimes, both by and against businesses, are so costly, elaborate measures have been put in place to decrease the likelihood of their occurrence.
see also Cyber Crime; Fraudulent Financial Reporting; Identity Theft; Privacy and Security
Bologna, G. Jack, and Shaw, Paul (2000). Avoiding cyber fraud in small businesses: What auditors and owners need to know. New York: Wiley.
Boni, William C., and Kovacich, Gerald L. (1999). I-way robbery: Crime on the Internet. Boston: Butterworth/Heinemann.
Boni, William C., and Kovacich, Gerald L. (1999). Netspionage: The global threat to information. Boston: Butterworth/Heine-mann.
Callahan, D. (2004). The cheating culture: Why more Americans are going wrong to get ahead. New York: Harcourt.
Coleman, J. W. (2002). The criminal elite: Understanding whitecollar crime (6th ed.). New York: Worth.
Comer, M. J. (1998). Corporate fraud (3rd ed.). Brookfield, VT: Gower.
Hunter, R. (2002). World without secrets: Business, crime, and privacy in the age of ubiquitous computing. New York: Wiley.
Loewy, A. H. (2004). Criminal law in a nutshell (4th ed.). St. Paul, MN: Thomson/West.
Mann, R. A., and Roberts, B. S. (2005). Essentials of business law and the regulation of business (8th ed.). Mason, OH: Thomson/South-Western/West.
Rezaee, Zabihollah (2002). Financial statement fraud: Prevention and detection. New York: Wiley.
Silverstone, Howard, and Sheetz, Michael (2004). Forensic accounting and fraud investigation for non-experts. Hoboken, NJ: Wiley.
Twomey, David P., Jennings, Marianne Moody, and Fox, Ivan (2002). Anderson's business law and the legal environment (18th ed.). Mason, OH: West/Thomson Learning.
Allen D. Truell
Truell, Allen; Milbier, Michael. "Crime and Fraud." Encyclopedia of Business and Finance, 2nd ed.. 2007. Encyclopedia.com. (May 31, 2016). http://www.encyclopedia.com/doc/1G2-1552100082.html
Truell, Allen; Milbier, Michael. "Crime and Fraud." Encyclopedia of Business and Finance, 2nd ed.. 2007. Retrieved May 31, 2016 from Encyclopedia.com: http://www.encyclopedia.com/doc/1G2-1552100082.html