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White-Collar Crime

Chapter 4
White-Collar Crime

A DEFINITION OF WHITE-COLLAR CRIME

The term "white-collar crime" was first used by the American criminologist Edwin H. Sutherland to define a violation of the criminal law committed by "a person of respectability and high social status in the course of his [or her] occupation" (White Collar Crime, 1949). In 1981 the U.S. Department of Justice developed a further definition, which included "nonviolent crime for financial gain utilizing deception and committed by anyone who has special technical and professional knowledge of business and government, irrespective of the person's occupation" (Dictionary of Criminal Justice Data Terminology, Bureau of Justice Statistics).

White-collar crimes include the following categories investigated by the Federal Bureau of Investigation (FBI):

  • Money laundering, securities and commodities fraud, bank fraud and embezzlement, environmental crimes, fraud against the government, election law violations, copyright violations, and telemarketing fraud.
  • International, national, and regional organized crime activities for which the FBI's expertise or capabilities increase the likelihood of a successful investigation and prosecution
  • Health care fraud, especially systemic abuses, such as large-scale billing fraud and fraudulent activities that threaten patient safety
  • Financial institution fraud involving $100,000 or more
  • Telemarketing and insurance fraud where there is evidence of nationwide or international activities.

HOW MANY CRIMES?

In The 2005 National Public Survey on White Collar Crime (2006, http://www.nw3c.org/research/national_public_survey.cfm), a report for the National White Collar Crime Center (NW3C), John Kane and April Wall detailed the results of interviews conducted with 1,605 adults. Survey participants were asked about their experiences and those of their households with white-collar crime during the previous twelve months.

Almost half (46.5%) of households and 36% of individuals surveyed reported that they had been a victim of white-collar crime during the previous year; 62.5% of individuals had experienced at least one type of white-collar crime in their lifetime. The most common white-collar crimes experienced by households included being misled about the price of a product or service (35.9% of reported incidents), having a credit card misused (24.5%), and being directly affected by a national corporate scandal (21.4%). Of households that experienced a white-collar crime, 67% reported the crime to at least one organization (such as a credit card company, business, or personal attorney), and 30.1% reported the crime to a law-enforcement or other crime-control agency. The most commonly reported crimes by individuals were pricing schemes (33.2%), credit card misuse (21.8%), and the effects of national corporate scandals (20.6%).

PERCEPTIONS OF WHITE-COLLAR CRIMES

The NW3C survey included questions about the perceived seriousness of several types of crime, including white-collar crimes. The most serious crime according to respondents was carjacking and murder, which received a score of 6.89 on a scale of 0 ("not serious") to 7 ("very serious"). Car theft was perceived as the least serious crime, with a score of 4.0 out of 7. All of the white-collar crimes included in the survey were perceived to be more serious than car theft, including omission of a safety report (6.18), insurance fraud (5.83), hacking into a database (5.6), embezzlement (5.58), overcharging for insurance (5.49), submitting a false earnings report (5.4), and auction fraud (5.12).

WHITE-COLLAR CRIME ARRESTS

The FBI reported in its Uniform Crime Reports (UCR) that of 14.1 million arrests for all crimes in the United States during 2005, 118,455 were for forgery and counterfeiting, 321,521 were for fraud, and 18,970 were for embezzlement. (See Table 1.4 in Chapter 1.) In an analysis of 10.4 million arrests processed by 10,974 agencies throughout the country in 2005, the FBI found that arrests for forgery and counterfeiting were most often reported in the South (37,328 arrests), followed by the West (23,410), Midwest (13,984), and Northeast (12,624) (http://www.fbi.gov/ucr/05cius/data/documents/05tbl30.xls). The largest number of arrests for fraud was also reported by southern agencies (140,271 arrests), followed by the Midwest (34,501), the Northeast (34,093), and the West (22,856). For embezzlement, the largest number of cases was also reported in the South (7,526), followed by the West (3,410), the Midwest (1,975), and the Northeast (1,186).

Among the 10,974 agencies reporting, most arrests for forgery and counterfeiting were made in cities (64,874 arrests), followed by suburban areas (34,552) and metropolitan counties (14,944) (http://www.fbi.gov/ucr/05cius/data/documents/05tbl31.xls). For fraud, arrests were also most common in cities (120,631), followed by suburban areas (115,295); 70,881 fraud arrests were made in metropolitan areas and 40,209 in non-metropolitan areas. There were 10,341 arrests for embezzlement in cities, 5,524 arrests for embezzlement in suburban areas, and 2,653 arrests for embezzlement in metropolitan areas.

WHITE-COLLAR CRIME OFFENDERS AND VICTIMS

According to the FBI's UCR, most white-collar crime offenders are over the age of 18, and the number of offenders under 18 years old decreased between 1996 and 2005 (http://www.fbi.gov/ucr/05cius/data/table_33.html). In data from 8,009 agencies nationwide, 2,600 people under age 18 were arrested for forgery and counterfeiting during 2005, a 52.1% decrease from 5,433 in 1996. The number of individuals under age 18 who were arrested for fraud in 2005 was 4,779, a 31.2% decrease from 6,947 in 1996. The decrease in the number of arrests of those under 18 for embezzlement in 2005 was less dramatic14.7% (from 880 in 1996 to 751 in 2005).

Although the 8,009 agencies reported more arrests of males than females for forgery/counterfeiting and fraud in 2005, they arrested more females than males for embezzlement. Specifically, 43,068 males were arrested in 2005 for forgery and counterfeiting, a 4.8% decrease from 45,250 in 1996; 104,201 were arrested for fraud (down 24.4% from 137,874 in 1996); and 5,979 were arrested for embezzlement (up 7.8% from 5,545 in 1996). For females, the arrest totals were 27,670 for forgery/counterfeiting (up 3% from 26,853 in 1996), 89,338 for fraud (down 23.8% from 117,288 in 1996), and 6,108 for embezzlement (up 32.6% from 4,607 in 1996).

IDENTITY THEFT

The incidence of identity theft has risen significantly in recent years as more and more transactions of every type are handled remotely using telephones, computers, and the Internet. Identity thieves steal personal information from victims, such as their social security, driver's license, credit card, or other identification numbers, and then set up new bank or credit card accounts or otherwise misrepresent themselves as their victims to obtain money, goods, or services fraudulently.

The Federal Trade Commission (FTC) was required by the Identity Theft and Assumption Deterrence Act of 1998 to form the FTC Identity Theft Hotline and Data Clearinghouse in 1999 to track incidents of this type of crime. The FTC reported in Identity Theft Victim Complaint Data: Figures and Trends January 1-December 31, 2005 that 255,565 cases of identity theft were reported in 2005. This figure was 3.5% higher than in 2004 (246,847 complaints) and 18.8% higher than in 2003 (215,177 complaints). (See Figure 4.1.)

In 2005 personal information stolen from identity theft victims was used to set up new credit card accounts or misuse existing accounts in 26% of the reported cases. Other identity theft crimes include unauthorized use of telephone, utility, and other communications services (18%), bank fraud (17%), and employment-related fraud (12%). (See Figure 4.2.)

According to the FTC, 29% of identity theft victims who reported the crimes were between 18 and 29 years old, 24% were 30 to 39 years old, and 20% were 40 to 49 years old. Those under the age of 18 and over age 60 were the least likely to be targets of identity theft. (See Figure 4.3.) The largest share of identity theft victims who reported the crimes (43%) discovered the theft within one month. Of the remainder, 16% learned of the theft within 6 months and 12% within 25 to 48 months. (See Figure 4.4.) The Bureau of Justice Statistics (BJS) reports that about one-third of households that experienced identity theft discovered the theft by missing money or noticing unfamiliar charges on an account; almost one-quarter learned of the theft when they were contacted by a credit bureau. (See Table 4.1.)

Overall, a third of the households participating in the National Crime Victimization Survey (NCVS) experienced one or more problems as a result of identity theft in 2004. According to Katrina Baum of the BJS in Identity Theft, 2004 (April 2006, http://www.ojp.usdoj.gov/bjs/pub/pdf/it04.pdf), more than one-third (34.1%) were contacted by a debt collector or creditor, a slightly smaller percentage (30.5%) had banking problems, 25.8% had problems with their credit card accounts, and 15.4% had to pay higher interest rates as a result of identity theft. About one-third of households were able to resolve the problems associated with the theft in one day, and one-fifth spent two to seven days correcting the situation. For nearly fifteen out of a hundred victims, resolving identity theft problems took between one and two months. (See Figure 4.5.)

Seven out of ten identity theft victims were aware of personal monetary losses resulting from the crime, according to Baum, and total dollar losses among victims reached $3.2 billion in 2004. In households that were aware of the extent of the financial loss they experienced, more than half (55%) sustained losses less than $500. One victim in twenty lost $5,000 or more.

CORPORATE CRIME

Tracking white-collar crime, especially corporate crime, is generally much more complicated than tracking other crimes. There often is no single offender or victim to report the crime. White-collar crime is often based on trust established between the victim and the offender before any crime is committed. Building trust expands the timeframe of the crime, permitting repeated thefts from an unsuspecting victim.

Different types of ethical violations linked to corporate crime include misrepresentation in advertising, deceptive packaging, socially irresponsible television commercials, sales of harmful and unsafe products, sales of virtually worthless products, environmental pollution, kickbacks and payoffs, unethical influences on government, unethical competitive practices, personal gain for management, unethical treatment of workers, trade secret theft, and victimization of local communities.

The tobacco industry offers an example of corporate crime. In November 1998, forty-six states collectively settled lawsuits they had brought against cigarette manufacturers. They had sought to recoup the health care costs associated with smoking-related illnesses that were paid out by state Medicaid agencies. Although the sale of tobacco products was legal, the states alleged that tobacco firms knew about the highly addictive nature of smoking and deliberately concealed their research findings from the general public for decades while promoting tobacco use.

Since the 1990s, several rulings have been made against tobacco companies. In October 2006, for example, Judge Gladys Kessler of the Federal District Court for the District of Columbia issued a decision in the Department of Justice racketeering lawsuit. She ordered tobacco companies to stop labeling cigarettes as "low tar" or "light" to give the false impression that they are less dangerous than full-flavor cigarettes. In her decision, Judge Kessler stated:

"Over the course of more than fifty years, defendants lied, misrepresented and deceived the American public, including smokers and the young people they avidly sought as replacement smokers, about the devastating health effects of smoking."

TABLE 4.1
How victims became aware of identity theft, by type of theft, July-December 2004
How theft was discovered Total Percent of thefts involving
Existing credit cards Other existing accounts Personal information Multiple types of theft during the same episode
Note: Table excludes 1% of households victimized by identity theft that did not provide an answer to how they became aware of the identity theft.
*Estimate based on 10 or fewer cases.
Source: Katrina Baum, "Table 2. How Victim Became Aware of Identity Theft, by Type of Identity Theft," in Identity Theft, 2004, U.S. Department of Justice, Office of Justice Programs, Bureau of Justice Statistics, April 2006, http://www.ojp.usdoj.gov/bjs/pub/pdf/it04.pdf (accessed January 15, 2007)
Issuer placed block on account  3.8%  4.5%  3.3%  1.0%*  5.3%*
Missing money or noticed charges on account 30.4 31.2 42.1  7.9 29.5
Contacted about late/unpaid bills 22.8 30.7  9.0 18.6 25.2
Banking problems 10.8 11.8 11.7  6.2 10.7
Noticed credit card or checkbook was missing  6.2  5.9  7.7  1.5*  9.7
Notified by police  1.1  0.4*  0.6*  3.8*  1.7*
Denied phone or utility service  2.4  0.1*  4.4  3.7*  5.7*
Noticed an error in credit report  5.6  4.4  3.0* 13.0  6.7*
Other way 28.6 19.3 35.2 49.0 27.5

FALSIFYING CORPORATE DATA

The collapse of the Enron Corporation is one of the most glaring examples of corporate crime and falsification of corporate data in recent history. Enron, based in Houston, Texas, was an energy broker trading in electricity and other energy commodities. In the late 1990s, however, instead of simply brokering energy deals, Enron devised increasingly complex contracts with buyers and sellers that allowed Enron to profit from the difference in the selling price and the buying price of commodities such as electricity. Enron executives created a number of "partner-ships"in effect, companies that existed only on paper whose sole function was to hide debt and make Enron appear to be much more profitable than it actually was.

On December 2, 2001, Enron filed for bankruptcy protection, listing some $13.1 billion in liabilities and $24.7 billion in assets$38 billion less than the assets listed only two months earlier. As a result, thousands of Enron employees lost their jobs. In addition, many Enron staffwho had been encouraged by company executives to invest monies from their 401k retirement plans in Enron stockhad their retirement savings reduced to almost nothing as a result of the precipitous decline in value of Enron stock.

In the wake of Enron's collapse, several committees in the U.S. Senate and House of Representatives began to investigate whether Enron defrauded investors by deliberately concealing financial information. Numerous lawsuits were filed against Enron, its accounting firm Arthur Andersen, and former Enron executives including former chairman Kenneth L. Lay and former chief executive officer Jeffrey Skilling.

Enron treasurer Ben Glisan Jr. was convicted of conspiracy charges to commit wire and securities fraud. He was sentenced to five years in prison and was released January 19, 2007. Lay and Skilling went on trial in January 2006. Federal prosecutor Kathryn Ruemmler accused the men of using "accounting tricks, fiction, hocus-pocus, trickery, misleading statements, half-truths, omissions and outright lies" in committing their crimes, as reported by Kristen Hays in the Chicago Sun-Times ("Prosecutor Tells Jury of Lay, Skilling 'Hocus-Pocus,'" May 16, 2006). On May 25 a jury found Lay guilty of all six counts against him in the corporate trial; he was also convicted of four counts of fraud in a separate trial relating to his personal finances. He faced twenty to thirty years in prison but died of a heart attack on July 5, 2006, before the judge set his sentence. The jury found Skilling guilty of nineteen of the twenty-eight counts against him, and he was sentenced to twenty-four years and four months in federal prison. Skilling began serving his sentence at a low-security federal facility in Waseca, Minnesota, and is projected to be released in 2028.

On June 15, 2002, a New York jury found accounting firm Arthur Andersen guilty of obstructing justice in connection with the Enron collapse. Arthur Andersen was convicted of destroying Enron documents during an ongoing federal investigation of the company's accounting practices. As a result of the verdict, Andersen faced a fine of $500,000 and a probation term of up to five years. Although the conviction was overturned by the U.S. Supreme Court in 2005, the firm is effectively out of the accounting business with its few remaining U.S. employees responsible for administrating the many legal cases generated by the scandal.

The Enron scandal helped lead to the passage of the Sarbanes-Oxley Act (SOX), signed into law on July 30, 2002. The law was designed to rebuild public trust in the U.S. corporate sector by imposing new criminal and civil penalties for security violations and establishing a new certification system for internal audits. SOX also grants independent auditors more access to company data and requires increased disclosure of compensation methods and systems, especially for upper management.

BANK FRAUD

The FBI investigates incidents of financial institution fraud, including insider fraud, check fraud, mortgage and loan fraud, and financial institution failures. According to the Financial Institution Fraud and Failure Report, Fiscal Year 2005 (2005, http://www.fbi.gov/publications/financial/2005fif/fif05.pdf), the FBI has seen a marked decline in the number of financial institution fraud investigations since the early 1990s. At the end of fiscal year (FY) 2005, the FBI was conducting 5,041 financial institution fraud investigations; 62 of these cases (1.2%) involved criminal activity related to failed financial institutions. This reflects a 92% reduction in failure investigations since the July 1992 peak of 758 cases. However, although the number of failure investigations has declined, the FBI is still involved in a substantial number of major financial institution fraud investigations. Major cases are defined as non-failure cases involving more than $100,000. In FY 2005, the FBI was investigating 4,135 major cases of institutional fraud. The number of major investigations underway had remained fairly stable during the period FY 2000 through FY 2005, with a high of 4,383 in FY 2001 and a low of 3,915 in FY 2004.

The U.S. Department of Justice reports in the Source-book of Criminal Justice Statistics (http://www.albany.edu/sourcebook/pdf/t31482005.pdf) that the number of convictions in financial institution fraud cases declined only slightly from 2000 (1,394 convictions) to 2005 (1,218 convictions). Almost $3.6 billion in restitution was reported in 2005, almost double the amount for 2002.

FRAUD AGAINST INSURANCE COMPANIES

Annually, thousands of acts of fraud against insurance companies are reported. These include faking a death to collect life insurance, setting fire to a house to collect property insurance, or claiming injuries not actually suffered.

The Internal Revenue Service (IRS) reports that it initiated twenty-four investigations of insurance fraud in FY 2006, down slightly from twenty-eight investigations in FY 2005 and twenty-five investigations in FY 2004 (http://www.irs.gov/compliance/enforcement/article/0,,id=118213,00.html). Of people convicted of insurance fraud in FY 2006, 93.3% were incarcerated and were sentenced to serve an average fifty months in confinement.

In one case, business owner Fred Rich of Portland, Texas, pleaded guilty to a mail fraud and money laundering conspiracy in January 2006. An IRS investigation revealed that he had defrauded insurance companies by staging vehicle accidents and making phony property damage claims for mold and water damage to residences. People who owed Rich money participated with him in several staged motor vehicle accidents at his business and home. The co-conspirators then filed insurance claims and split the proceeds with Rich. Rich was sentenced on March 9, 2006, to fifty months in prison followed by three years of supervised release. He was also ordered to pay $629,000 in restitution and a $10,000 fine.

FRAUD BY INSURANCE COMPANIES

Some insurance companies have been found guilty of defrauding their customers. For example, David Brabandt and his sister Barbara Del Aguila, who operated the Aguila Insurance Agency in Dallas, Texas, were charged in April 2005 with taking payments from over 300 people and not purchasing insurance for them. They pleaded guilty on February 1, 2006, to two felony charges, were sentenced to two years in prison, and were ordered to pay $183,861.29 in restitution.

In March 2006 Michael T. McRaith, director of insurance for the State of Illinois, issued a cease and desist order against the Safe Auto Insurance Company of Columbus, Ohio. According to McRaith, Safe Auto had not properly notified the Secretary of State's office of policies it held for drivers in Illinois. As a result, the state suspended the driver's licenses and vehicle registrations of several policy-holders who had paid premiums to the company. The company was ordered to correct its notification procedures and pay customer expenses resulting from the improper filings.

SECURITIES FRAUD

There are many laws regulating the securities marketswhich include the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation (NASDAQ)and the corporations that sell "securities" on the markets. These regulations require corporations to be honest with their investors about the corporations; they also require stockbrokers to be forthcoming with their clients.

Despite these rules, both the corporate officials who release information about their companies and the stockbrokers who help people invest in securities sometimes knowingly lie to or hide information from consumers to raise a company's stock level for their own profit. Corporations commit this type of fraud by releasing false information to the financial markets through news releases, quarterly and annual reports, Securities and Exchange Commission (SEC) filings, market analyst conference calls, proxy statements, and prospectuses. Brokers commit this type of fraud by failing to follow clients' instructions when directed; misrepresenting or omitting information; or making unsuitable recommendations or investments, unauthorized trades, or excessive trades (churning). Because brokerage analysts' recommendations to clients can affect the fees earned by the firms' investment banking operations, analysts can profit by playing up the value of certain stocks.

The Stanford Law School Securities Class Action Clearinghouse, in cooperation with Cornerstone Research, tracks the number of securities fraud class action filings each year. In 2006 there were 118 filings (Securities Class Action Case Filings, 2006: A Year in Review, 2007, http://securities.stanford.edu/). The 2006 total was considerably lower than the ten-year average of 193 per year and was the lowest annual total since the Public Securities Litigation Reform Act was adopted in 1995. Filings were down by 38% from the 178 filed in 2005.

Of the 110 filings in 2006, almost one-third (36) involved the noncyclical consumer industry (agriculture, beverage, biotechnology, commercial services, cosmetics/personal care, food, healthcare products, healthcare services, household products/wares, and pharmaceuticals). Twenty-one of the filings involved technology companies. The most common allegations made were misrepresentation in financial documents and accounting irregularities.

Cornerstone Research speculates that the dramatic drop in securities fraud class action filings in 2006 might be due in part to increased enforcement activities by the SEC and the Department of Justice as well as passage of the Sarbanes-Oxley Act of 2002. With heavy penalties involved for infractions, corporations appeared to have adopted a more conservative approach in accounting, which resulted in fewer filings.

In a suit resolved during 2006, Gladys Kessler, U.S. District Court Judge for the District of Columbia, approved a plan to distribute $300 million to investors of Time Warner Inc. to settle a lawsuit stemming from accounting fraud perpetrated by the company. In the suit, Time Warner was charged with overstating its online advertising revenue and the number of its Internet subscribers.

Oil and Gas Investment Frauds

The U.S. Postal Inspection Service reports in Oil and Gas Investment Frauds (http://www.usps.com/postalinspectors/fraud/oil-gas.htm) that although many oil and gas investments are legitimate, this area is well known for fraudulent offers made to potential investors. Illegitimate solicitors operate what are known as "boiler rooms," hastily set-up business offices with few furnishings. From these locations telephone solicitors call consumers in an attempt to convince them to invest in bogus oil or gas drilling ventures. Typically, the phone solicitors guarantee high profits, stress that the offer is only available to a select group of investors, and insist on an immediate decision. According to Kathy Chu in USA Today ("Prices Prompt Oil, Gas Investment Scams," August 17, 2006), investors seeking to make quick profits in the energy sector have lost millions of dollars in illegitimate oil and gas investments. Oil and gas fraud was one of the top five investor scams in the state of Texas during 2006.

TELEMARKETING FRAUD

Telemarketing is a form of direct marketing in which representatives from companies call consumers or other businesses in order to sell their goods and services. Telemarketing services can also be tied to other forms of direct marketing such as print, radio, or television marketing. For example, a television advertisement might ask the viewer to call a toll-free number. The overwhelming majority of telemarketing operations are legitimate and trustworthy.

The National Fraud Information Center (NFIC) is a project of the National Consumers League (NCL), a nonprofit organization. The NFIC reported that in 2006, 31% of all telemarketing complaints received by the NCL's Fraud Center involved false check scams, in which consumers received notification that they have won a prize along with a phony check and a phone number to call for instructions on how to pay taxes or fees associated with claiming the prize (http://fraud.org/stats/2006/telemarketing.pdf). The average loss from these scams was $3,278. Another common telemarketing scam involved requests for payment to claim prizes that were never sent; 26% of all complaints were in this category and these victims lost an average of $2,749.

On December 20, 2006, two co-owners and seven office managers of Gecko Communications Inc. were sentenced for participating in a scheme to defraud an estimated 83,000 people across the country of more than $15.6 million. The company made false offers to provide credit cards to people with poor credit and charged up to $229 for the cards. To execute their plan, the Gecko company purchased lists of consumers with low credit ratings. Misrepresenting themselves as a financial company with credit counselors on staff, Gecko convinced consumers to pay for the opportunity to receive a pre-approved credit card. In fact, those who paid were sent credit card applications. The defendants were sentenced to prison terms ranging from two to six years. They were also ordered to pay restitution.

MAIL CRIME

The U.S. Postal Inspection Service (USPIS) investigates crimes involving the nation's mail, including mail fraud, mail theft, and the mailing of controlled substances. Postal inspections resulted in 6,788 arrests and 5,544 convictions for mail theft (theft and possession of stolen mail) during FY 2005 (http://www.usps.com/postalinspectors/05anrept.pdf). In addition, there were 1,855 arrests and 1,279 convictions for mailing controlled substances (such as narcotics, steroids, and drug paraphernalia) and 1,577 arrests and 1,264 convictions for mail fraud. In one notable case, a twenty-year-old man from Massachusetts was convicted on May 4, 2006, of wire and mail fraud charges. He had advertised Superbowl tickets on eBay, collected approximately $255,000 from customers, and never provided the tickets or refunds.

COMPUTER CRIME

Federal Computer Crime Legislation

The first state computer crime law took effect in Florida in 1978. Other states soon followed until all fifty states had computer crime provisions.

In 1986 Congress passed the Computer Fraud and Abuse Act (P.L. 99-474) that makes it illegal to perpetrate fraud on a computer. The Computer Abuse Amendments of 1994 (P.L. 103-322) make it a federal crime "through means of a computer used in interstate commerce of communication [to] damage, or cause damage to, a computer, computer system, network, information, data, or program with reckless disregard" for the consequences of those actions to the computer owner. This law pertains to maliciously destroying or changing computer records or knowingly distributing a virus that shuts down a computer system. A virus program resides inside another program and is activated by some predetermined code to create havoc in the host computer. Virus programs can be transmitted by sharing disks and programs or through e-mail.

The 2001 USA Patriot Act, which gave increased powers to U.S. government law enforcement and intelligence agencies to help prevent terrorist attacks, amended the Computer Fraud and Abuse Act. The act was expanded to include the types of electronic records that law enforcement authorities may obtain without a subpoena, including records of Internet session times and durations, as well as temporarily assigned network addresses. The Patriot Act was reauthorized on March 9, 2006, in the USA Patriot Improvement and Reauthorization Act of 2005 (HR 3199).

Internet Fraud

The National White Collar Crime Center and the FBI reported that the Internet Crime Complaint Center (IC3) Web site received 231,493 complaints of Internet crime in 2005 (IC3 2005 Internet Crime Report, 2006, http://www.ic3.gov/media/annualreport/2005_IC3Report.pdf). This represents an 11.6% increase over 2004 when the center received 207,449 complaints. Of these complaints, IC3 referred 97,076 to federal, state, and local law enforcement agencies for further consideration. Almost all of these cases involved fraud leading to financial loss for the victim. The total dollar cost of all cases of Internet fraud referred to law enforcement agencies was $183.12 million, with a median loss of $424 per complaint. This is a significant increase from $68 million in losses reported in 2004.

The most frequently reported Internet offense (62.7% of complaints) involved Internet auction fraud. Other complaints were for nondelivered merchandise and/or payment (15.7% of complaints) and credit card fraud (6.8%). About three-quarters (75.4%) of offenders were male and half resided in just seven states (California, New York, Florida, Texas, Illinois, Pennsylvania, and Ohio). Fraudulent contacts took place primarily by e-mail and Web pages. Almost three-quarters (73.2%) of complainants had engaged in e-mail contact with the perpetrator compared with 16.5% through a Web page.

SPAM

The IC3 defines "spam" as unsolicited bulk e-mail. According to IC3, spam is widely used to commit traditional white-collar crimes, including financial institution fraud, credit card fraud, and identity theft. Spam messages are usually considered unsolicited because the recipients have not chosen to receive the messages. Generally, spam involves multiple identical messages sent simultaneously. Spam can also be used to access computers and servers without authorization and transmit viruses or forward spam. Spam senders often sell open proxy information, credit card information, and e-mail lists illegally.

The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM Act, P.L. 108-187, S. 877) established requirements for those who send commercial e-mail. CAN-SPAM requires that all spam contain a legitimate return address as well as instructions on how to opt out of receiving additional spam from the sender. Spam must also state in the subject line if the e-mail is pornographic in nature. Violators of these rules are to be subject to heavy fines.

The law's main provisions include:

  • Banning false or misleading header information The "from," "to," and routing information (including the originating name and e-mail address) must be accurate and identify the person who initiated the e-mail.
  • Prohibiting deceptive subject lines The subject line must not mislead the recipient about the message's contents or subject matter.
  • Requiring an opt-out method Senders must provide a return e-mail address or another Internet-based way that allow the recipient to ask the sender not to send any more e-mail messages to them.

The first person convicted by a jury in a CAN-SPAM case was Jeffrey Brett Goodin of California. He was found guilty on January 12, 2007, of operating an Internet-based scheme to obtain personal and credit card information. Goodin sent e-mails to AOL users that appeared to be from AOL's billing department. The messages instructed recipients to "update" their AOL billing information or lose service. The Web pages were actually scam pages set up by Gooding to collect personal and credit card information on the users.

SPYWARE

The Anti-Spyware Coalitiona group composed of software manufacturers, academics, and consumer advocatesdefines spyware as "Technologies deployed without appropriate user consent and/or implemented in ways that impair user control over:

  • Material changes that affect their user experience, privacy, or system security
  • Use of their system resources, including what programs are installed on their computers; and/or
  • Collection, use, and distribution of their personal or other sensitive information" (http://www.antispywarecoalition.org/about/FAQ.html).

According to the National Conference of State Legislatures, four statesHawaii, Louisiana, Rhode Island, and Tennesseehad enacted or adopted anti-spyware legislation in 2006 and another eighteen states were considering such legislation. California's Consumer Protection Against Computer Spyware Act makes it illegal for anyone to install software on someone else's computer and use it to deceptively modify settings, including the user's home page, default search page, or bookmarks. The act also outlaws collecting, through intentionally deceptive means, personally identifiable information by logging keystrokes, tracking Web site visits, or extracting personal information from a user's hard drive.

In November 2006 the federal government reached a settlement in the case of Odysseus Marketing, Inc., a company that advertised a free file-sharing software program and then exploited consumers who downloaded the program. Odysseus intercepted and replaced search results of users, attacked them with numerous pop-up advertisements, and copied their keystrokes, including such information as names, addresses, and Internet browsing habits. In the settlement, the defendants agreed not to download spyware in the future or exploit security vulnerabilities in Internet Explorer or other browsers. In addition, the government imposed a fine of $50,000.

Computer Hacking

Computer hacking takes place when an outsider gains unauthorized access to a secure computer by identifying and exploiting system vulnerabilities. Criminal hackers use their software expertise to crack security codes in order to access stored information or "highjack" a computer (that is, take it over and instruct it to generate spam or perform other malicious actions). The Web Application Security Consortium tracks hacking incidents that have been reported in the media and that result from vulnerabilities in Web application security. The consortium reported that the number of Web hacking incidents has increased significantly in recent years, from just nine in 2003 to forty-four in 2006. However, the number of hacking incidents in 2006 did decrease from 2005, when sixty-one hacking incidents were reported (http://www.webappsec.org/projects/whid/statistics.shtml).

A survey of security executives and law enforcement personnel conducted by CSO Magazine, the U.S. Secret Service, and the CERT® Coordination Center found that in 2005 hackers were considered the greatest computer security threat to U.S. companies (www.cert.org/archive/pdf/ecrimesummary05.pdf). More than one-third (37%) of respondents identified hacking as the greatest computer security threat to their organizations. About half as many (18%) identified current employees as the greatest threat, and 5% listed former employees.

According to Ethan Butterfield in Washington Technology, state governments increased security activities in response to several hacking incidents in 2006 ("Fear Factor: Spike in Malicious Hacking Creates Need for Vigorous Action at State Level." October 2, 2006, http://www.washingtontechnology.com/print/21_19/29418-1.html). Included in the high-profile incidents were attacks on the Nebraska state child-support payment system and the IT systems of Ohio University, leaving the personal information of hundreds of thousands of people at risk.

The federal government is also vulnerable to hackers. In November 2006 a federal grand jury indicted a Romanian man, Victor Faur, a citizen of Romania, who gained unauthorized access to more than 150 different government computers (http://oig.nasa.gov/press/pr2007-C.pdf). Faur targeted computers at the Jet Propulsion Laboratory, Goddard Space Flight Center, Sandia National Laboratories, and U.S. Naval Observatory. Prosecutors speculate that U.S. government computers were targeted because of their reputation for high security; once he had control of the computers, the hacker merely set up chat rooms and bragged about his accomplishment. If convicted, Faur faces a maximum sentence of fifty-four years in federal prison. The incident cost about $1.5 million in estimated repairs, data losses, and system improvements

INTELLECTUAL PROPERTY

According to the World Intellectual Property Organization, "intellectual property" comprises "creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce" (http://www.wipo.int/about-ip/en/). These include industrial property such as trademarks, chemical formulas, patents, and designs, and copyrighted material such as literary works, films, musical compositions and recordings, graphic and architectural designs, works of art in any medium, and domain names.

The Intellectual Property Owners Association reports that the number of intellectual property suits in the U.S. federal court system in 2006 included 4,944 copyright cases, 3,740 cases related to trademark infringement, and 2,830 patent cases (http://www.ipo.org/). Trademark infringements increased by 17.3% between 1997 and 2006, and by 2% between 2005 and 2006. The number of patent infringement suits increased by 34% between 1997 and 2006, and by 4% between 2005 and 2006. Most dramatically, the number of suits related to copyrights increased more than 119% between 1997 and 2006, and by 14.7% between 2005 and 2006.

In the United States intellectual property is protected by the joint efforts of the United States Patent and Trademark Office, the U.S. Copyright Office, the U.S. Department of Justice, U.S. Department of Commerce, and two agencies that focus on international aspects of intellectual property: the U.S. Customs Service, which monitors incoming goods arriving from other nations, and the Office of the U.S. Trade Representative, which negotiates on behalf of U.S interests and develops and implements trade agreements and policies.

In a speech before the U.S. Chamber of Commerce on June 20, 2006, U.S. Attorney General Alberto Gonzales reported that the costs of intellectual property theft to American businesses include $250 billion in financial losses and 750,000 lost jobs every year (http://www.usdoj.gov/ag/speeches/2006/ag_speech_060620.html). Gonzales stressed, however, that these figures do not include the costs of intellectual property theft to the nation's economy overall. In his remarks, Gonzales referred to the case of Danny Ferrer, who pleaded guilty in June 2006 to copyright infringement. Ferrer sold almost $2.5 million worth of pirated software through his Web site until the FBI shut it down in October 2005. Ferrer's sales resulted in almost $20 million in losses to the copyright holders of the products he copied illegally. Ferrer faced a maximum sentence of ten years in prison and a $500,000 fine.

ANTITRUST VIOLATIONS

Antitrust violations include price fixing, bid rigging, and other conspiracies that artificially inflate prices and cheat consumers. Such schemes are illegal because they deprive consumers of fair access to products at reasonable prices. Market division, in which competitors agree to divide customers among themselves, is also illegal for the same reason. The Department of Justice reported that in 2006 the Antitrust Division obtained the second highest level of criminal fines in the division's history. For the fiscal year ending on September 30, 2006, the division obtained $473 million in criminal fines, a 40% increase over FY 2005, and filed 33 criminal cases, many of which involved several defendants. (See Figure 4.6.)

TABLE 4.2
Criminal investigations by the Internal Revenue Service, fiscal years 200406
Fiscal year 2006 Fiscal year 2005 Fiscal year 2004
*Incarceration includes confinement to federal prison, halfway house, home detention, or some combination thereof.
Source: "Statistical DataGeneral Tax Fraud," in Criminal Investigations: Tax Fraud Alerts, U.S. Department of the Treasury, Internal Revenue Service, 2007, http://www.irs.gov/compliance/enforcement/article/0,,id=106791,00.html (accessed January 21, 2007)
Investigations initiated  1863  1873  1736
Prosecution recommendations  1020  1157  1197
Indictments/informations   830   953   941
Sentenced   691   804   657
Incarceration rate* 75.10% 79.10% 83.60%
Average months to serve    26    28    27

TAX FRAUD

For most Americans, failure to pay the correct amount of taxes to the Internal Revenue Service (IRS) results in agreement to pay off the taxes in some manner. However, when the IRS believes it has found a pattern of deception designed to avoid paying taxes, criminal charges can be brought. In 2006 the Criminal Investigations Division of the IRS initiated 1,863 cases, slightly lower than 1,873 in 2005 but higher than 1,736 cases in 2004. (See Table 4.2.) Of cases investigated in 2006, the IRS recommended prosecution in 1,020 cases, and in 830 cases criminal charges were filed or brought by indictment. The IRS reported 691 convictions for tax fraud, and defendants were incarcerated in 75.1% of cases for an average of 26 months.

FORGERY AND COUNTERFEITING

As technology advances, forgers can use sophisticated computers, scanners, and laser printers to make copies of more and more documents, including counterfeit checks, identification badges, driver's licenses, and money.

Making counterfeit U.S. currency or altering genuine currency to increase its value is punishable by a fine, imprisonment of up to fifteen years, or both. Possession of counterfeit U.S. currency is also a crime, punishable by a fine, imprisonment of up to fifteen years, or both. Counterfeiting is not limited to paper money. Manufacturing counterfeit U.S. coins in any denomination above five cents is subject to the same penalties as all other counterfeit activities. Anyone who alters a real coin to increase its value to collectors can be punished by a fine, imprisonment for up to five years, or both. The level of counterfeit bills in circulation worldwide is estimated to be less than 0.02% of all bills, about one to two counterfeit bills for every 10,000 genuine bills, according to the U.S. Bureau of Engraving and Printing (http://www.moneyfactory.gov/newmoney/main.cfm/media/releases102003newyork).

In response to the growing use of computer-generated counterfeit money, the U.S. Department of the Treasury redesigned the $50 and $100 bills in the 1990s and introduced new $5, $10, and $20 bills between 1998 and 2000. These bills contain a watermark making them harder to accurately copy. Another change in currency design was introduced in October 2003: a new $20 bill with shades of green, peach, and blue in the background. A blue eagle and metallic green eagle and shield have also been added to the bill's design. A new $50 note was issued on September 28, 2004, and a new $10 note was issued on March 2, 2006. On June 29, 2006, the U.S. government announced plans to redesign the $5 note and issue the new note in early 2008.

The Secret Service explains that many counterfeiters have abandoned the "traditional" method of offset printing, which requires specialized skills and machinery. Instead counterfeiters produce fake currency with basic computer training and typical office equipment. Although the number of counterfeit bills in circulation is likely to increase because more people have access to the machines and methods required to produce them, the security features added to the design and manufacture of U.S. currency have also made it easier to detect bogus bills.

The Department of the Treasury reports in The Use and Counterfeiting of United States Currency Abroad, Part 3 (September 2006, http://www.federalreserve.gov/boarddocs/rptcongress/counterfeit/counterfeit2006.pdf), the value of U.S. currency determined to be counterfeit after entering circulation was $61 million in 2005, up by more than 50% since 1999, when $40.6 million in counterfeit was found in circulation. During this period, the value of counterfeit currency seized before entering circulation was $52.6 million, down from $140.3 million in 1999. (See Table 4.3.)

MONEY LAUNDERING

The U.S. Government Accountability Office defines money laundering as "disguising or concealing illicit funds to make them appear legitimate" (http://www.gao.gov/new.items/d04710t.pdf). Money laundering involves transferring illegally received monies into legal accounts so that when money is withdrawn from those accounts, it appears to the police or other government authorities to be legal earnings of the account or the business. When a money-laundering scheme is successful, the criminals can spend their illegally acquired money with little fear of being caught. Many of the techniques that launderers use would be perfectly legal business transactions if the source of the cash were not illegal activities.

TABLE 4.3
Counterfeit currency seized and passed, 19992005
[Millions of dollars]
Year Passed Seized
Domestic Foreign Total Domestic Foreign Total
Note: "seized" refers to counterfeit currency that was detected before being circulated, while "passed" indicates currency that was determined to be counterfeit after entering circulation. Only passed currency represents a loss to the public; seized counterfeits represent an averted threat.
Source: "Table 6.2. Data on Counterfeit Currency, Fiscal Years 19992005," in The Use and Counterfeiting of United States Currency Abroad, Part 3, U.S. Department of the Treasury, September 2006, http://www.ustreas.gov/press/releases/reports/the%20use%20and%20counterfeiting%20of%20u.s.%20currency%20abroad%20%20part%203%20september2006.pdf (accessed February 3, 2007)
1999 39.2 1.4 40.6 13.7 126.6 140.3
2000 39.7 1.4 41.1 20.9 190.8 211.7
2001 47.5 1.5 49.0 12.6 54.0 66.6
2002 42.9 1.4 44.3 9.7 120.4 130.1
2003 36.6 1.5 38.1 10.7 52.2 62.9
2004 43.6 1.2 44.7 10.3 33.6 43.9
2005 56.2 4.8 61.0 14.7 37.9 52.6

Over the years the federal government has enacted a number of laws to prevent money laundering. For example, the Uniting and Strengthening America Act by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (P.L. 107-56), known as the USA Patriot Act, fortified laws dealing with how U.S. banks use foreign banks to transfer money into and out of the country and the financing of terrorist organizations and activities. It also outlawed bulk cash smuggling, making it illegal to take more than $10,000 in concealed cash across the border to avoid reporting requirements.

On July 5, 2006, the Financial Crimes Enforcement Network, a section of the U.S. Department of the Treasury, issued final regulations for Section 312 of the USA Patriot Act. This section addresses correspondent accounts for foreign financial institutions as well as accounts opened in the United States by noncitizens. According to the new regulations, financial institutions are required to establish and implement policies to detect and report suspicious money-laundering activities. In addition to tighter controls at U.S. institutions, the federal government also extended its ability to obtain financial evidence abroad. As of March 2007 the U.S. Department of State and Department of Justice had entered into mutual legal assistance treaties (MLATs) with fifty-one countries. MLATs facilitate evidence gathering in international criminal cases, and make it possible to access banking and other financial records from foreign institutions in money-laundering cases.

Increased awareness of money laundering is reflected in the number of Suspicious Activity Reports (SAR) submitted by banks to the U.S. Department of the Treasury. Banks are required to submit these reports whenever they have reason to believe that a transaction of at least $5,000 involves money derived from illegal activities. In the SAR Activity Review: Trends, Tips, and Issues (May 2006, http://www.fincen.gov/sarreviewissue10.pdf), the Treasury Department reported that it received 345 SARS regarding more than $1,000 in checks cashed by a single individual in one day, 309 suspicious money transfers, and 12 reports regarding suspected money laundering. (See Table 4.4.)

The number of money-laundering investigations initiated by the IRS has declined in recent years, from 1,789 in FY 2004 to 1,443 in FY 2006. Although the number of prosecutions has also decreased, from 1,515 in 2004 to 1,248 in 2006, the number of defendants sentenced has increased from 687 in FY 2004 to 800 in FY 2006. Similarly, the average number of months that those convicted serve in prison has increased from 63 months in FY 2004 to 74 months in FY 2006. (See Table 4.5.)

The U.S. Attorney's office in Seattle, Washington, reported the conclusion of one money laundering case in October 2006. The defendant in the case pleaded guilty to "willful failure to report a currency transaction in excess of $10,000," according to the U.S. Attorney's Office (http://www.usdoj.gov/usao/waw/press/2006/oct/plowman.html). The defendant, an attorney who represented a cocaine dealer, had accepted cashier's checks totaling $176,000 from his client to purchase a laundromat. The attorney did not document his receipt of this money, kept in a safe in his office, and failed to submit the required IRS forms recording large money transfers. According to the prosecutors, the attorney then used a $60,000 check and $100,000 in cash to purchase the business on behalf of his client, but wrote a sales document reflecting a purchase price of only $60,000, allowing $100,000 to transfer in the sale without documentation. Admitting this transaction was part of a pattern of similar unlawful actions. The attorney faced a sentence of ten years in prison.

TABLE 4.4
Suspicious activity reports submitted to the U.S. Department of the Treasury, 2005
Activity Occurrences Percentage of total reported activities
Source: "Table 1. Types of Reported Activities," in "Section 2Trends and Analysis," SAR Activity Review: Trends, Tips, and Issues, no. 10, May 2006, http://www.fincen.gov/sarreviewissue10.pdf (accessed February 4, 2007)
Check cashing (over $1,000 aggregate for any person on any day) 345 27.87%
Check cashing (non-specific) 339 27.38%
Money transmission 309 24.96%
Money services businesses activities (non-specific) 131 10.58%
Informal value transfer systems (including hawala) 49 3.96%
Arrests, indictments, and illicit activities associated with the operation of unregistered money services business 15 1.21%
On money services business registration list without authorization date 13 1.05%
No apparent money services business activity 13 1.05%
Money laundering 12 0.97%
Currency exchange 7 0.57%
Black market peso exchange-like activity 2 0.16%
Exchange of cashed third-party checks with related business for cash 2 0.16%
Registered money services business facilitating transfers for related unregistered money services business 1 0.08%
    Totals 1,238 100.00%
TABLE 4.5
Money laundering and Bank Secrecy Act investigations by the Internal Revenue Service, fiscal years 200406
Money laundering investigations Fiscal year 2006 Fiscal year 2005 Fiscal year 2004
*Incarceration includes confinement to federal prison, halfway house, home detention, or some combination thereof.
Notes: Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year. BSA statistics include investigations from Suspicious Activity Report (SAR) Review Teams, violations of BSA filing requirements, and all Title 31 and Title 18-1960 violations.
Source: "Statistical DataMoney Laundering Enforcement," in Criminal Investigations: Tax Fraud Alerts, U.S. Department of the Treasury, Internal Revenue Service, 2007, http://www.irs.gov/compliance/enforcement/article/0,,id_113002,00.html (accessed February 4, 2007)
Investigations initiated  1443  1639  1789
Prosecution recommendations  1248  1338  1515
Indictments/informations  1016  1147  1304
Sentenced   800   782   687
Incarceration rate* 88.10% 88.40% 89.10%
Average months to serve    74    62    63
Bank Secrecy Act (BSA) investigations
Investigations initiated   554   546   523
Prosecution recommendations   437   379   501
Indictments/informations   364   359   417
Sentenced   332   310   280
Incarceration rate* 75.30% 83.20% 83.20%
Average months to serve    43    42    37

RETAIL STORE THEFT

The 2005 National Retail Security Survey Final Report (2006) by Richard Hollinger and Lynn Langton of the University of Florida is an annual survey of retail theft. The 2005 survey analyzed data from 156 of the largest U.S. retail chains. The survey found that retail shrinkagea combination of employee theft, shoplifting, vendor fraud, and administrative errorrepresented about 1.6% of total annual sales in 2005, an increase from 1.5% in 2004 but a decrease from 1.8% in 1991. (See Figure 4.7.) Shrinkage rates were highest (4.7%) for accessories retailers, followed by home center/hardware/lumber/garden stores (3.2%) and craft/hobby stores (2.6%). (See Figure 4.8.)

According to the survey, employee theft accounts for more losses from retail theft than any other cause. (See Figure 4.9.) However, the average loss per employee-theft incident had decreased from $1,762 in 2003 to $1,053 in 2005. This is probably due to increased use of surveillance technology by retailers.

The 18th Annual Retail Theft Survey conducted by Jack L. Hayes International, a retail security consulting firm, collected information from 24 large retail companies with 13,313 stores and $519 billion in 2005 retail sales (http://www.hayesinternational.com/thft_srvys.html). Nationwide these retailers apprehended more than 670,000 corrupt employees and shoplifters in 2005. Merchandise recovered through these captures was valued at more than $127 million, up 17.3% from 2004. However, goods recovered amounted to less than 3% of losses. The survey indicates that for every dollar recovered by retailers, $37.05 was lost to theft. Furthermore, the companies reported one out of every 26.5 employees was caught stealing. On average, employee thieves stole more than their shoplifting counterparts, with an average $724.15 stolen by employees and $126.87 stolen by shoppers.

PUBLIC CORRUPTION

Abuse of public trust may be found wherever the interest of individuals or businesses overlaps with government interest. It ranges from the health inspector who accepts a bribe from a restaurant owner or the police officer who "shakes down" the drug dealer, to the council member or legislator who accepts money to vote a certain way. These crimes are often difficult to uncover, as often few willing witnesses are available.

The U.S. Department of Justice reports in its Report to Congress on the Activities and Operations of the Public Integrity Section for 2005 (2006, http://www.usdoj.gov/criminal/pin/docs/AnnReport_05.pdf) that the number of persons indicted for offenses involving the abuse of public office increased steadily from 1973 to 1983 and has remained relatively stable since that time. In 2005, 1,163 people were indicted and 1,027 were convicted in public corruption cases. Of those indicted, 445 were elected or appointed federal officials, 96 were state officials, 309 were local officials, and the remaining 313 were private citizens not employed by the government. (See Table 4.6.)

Bribes, Kickbacks, and Racketeering

In one of the most notable cases involving bribery and kickbacks, Jack Abramoff, a prominent lobbyist in Washington, D.C., pleaded guilty to fraud, tax evasion, and conspiracy to bribe public officials in January 2006. He was sentenced to five years and ten months in prison and ordered to pay $21 million in restitution.

Abramoff received kickbacks from his former business partner, Michael Scanlon, in a conspiracy to defraud Native American tribes who sought government approval to operate casinos. The tribes hired Abramoff to represent their interests, and he then recommended Scanlon's public relations firm to the tribes. Abramoff received a kickback from Scanlon for the referral. Abramoff and Scanlon supplied financial incentives, trips, and entertainment expenses to public officials whose support was needed for the projects they represented.

Abramoff was also listed as a co-conspirator in the charges against former Rep. Robert W. Ney (R-OH), who was sentenced in January 2007 to thirty months in prison and two years of supervised release. In addition Ney was ordered to serve 100 hours of community service for each year of supervised release and pay a $6,000 fine. Ney pleaded guilty on October 13, 2006, to honest services fraud, lobbying violations, and making false statements to the U.S. House of Representatives. Ney represented the 18th District of Ohio from 1995 through 2006. He admitted that he accepted international and domestic trips, meals, sports and concert tickets, and other incentives from Abramoff and others in exchange for his support on matters before the House of Representatives. In addition to Abram-off and Scanlon, a foreign businessman also provided financial incentives to Ney in return for his support in obtaining a travel visa and an exemption from legal restrictions against foreign nationals selling U.S. aircraft abroad.

SCAMS ON THE ELDERLY

Because senior citizens are often retired and living on fixed incomes and savings, the promise of economic security can be very alluring. As a consequence, the elderly can be particularly vulnerable to economic crimes such as fraud and confidence schemes.

Seniors are particularly vulnerable to con artists. Often, they are lonely, isolated from their families, and sometimes more willing than in earlier years to believe what they are told. Some suffer mental or physical frailties that leave them less able to defend themselves against high-pressure tactics. In addition, they may be financially insecure and may want to believe the con artist's promises of future wealth and security. Since many elderly are too embarrassed to admit that they have been fooled, many of these crimes are not reported.

Statistics on fraud against the elderly, sometimes called elder scams, are not collected by the major crime reporting agencies. Surveys conducted by the AARP (formerly the American Association of Retired Persons) indicated that most victims of telemarketing fraud were fifty years of age or older. Top frauds committed against those sixty or older involved prizes/sweepstakes, lotteries/lottery clubs, and magazine sales.

One popular scam involves con artists calling or mailing information to elderly people announcing that they have won a free prize, but must pay postage and handling to receive it. They are told a credit card number is needed to pay these costs. The thieves then use the credit card number to buy items and to get cash. The elderly are also susceptible to repairmen who stop by and say they can fix their homes. The workers may do the repair work, but it is shoddy and overpriced. If the elderly try to complain, the repairmen are no longer in the area, possibly not even in the state.

TABLE 4.6
Number of officials and private citizens prosecuted in public corruption cases, selected years 19862005
1986 1987 1989 1991 1993 1995 1997 1999 2001 2003 2004 2005
Source: Adapted from "Table II. Progress over the Last Two Decades: Federal Prosecutions of Public Corruption by U.S. Attorneys' Offices," in Report to Congress on the Activities and Operations of the Public Integrity Section for 2005, U.S. Department of JusticeCriminal Division, 2006, http://www.usdoj.gov/criminal/pin/AnnReport_05.pdf (accessed January 17, 2007)
Federal officials
Charged 596 651 695 803 627 527 459 480 502 479 424 445
Convicted 523 545 610 665 595 438 392 460 414 421 381 390
Awaiting trial as of 12/31 83 118 126 149 133 120 83 101 131 129 98 118
State officials
Charged 88 102 71 115 113 61 51 115 95 94 111 961
Convicted 71 76 54 77 133 61 49 80 61 87 81 94
Awaiting trial as of 12/31 24 26 18 42 39 23 20 44 75 38 48 51
Local officials
Charged 232 246 269 242 309 236 255 237 224 259 268 309
Convicted 207 204 201 180 272 191 169 219 184 119 252 232
Awaiting trial as of 12/31 55 89 122 88 132 89 118 95 110 106 105 148
Private citizens
Charged 292 277 313 292 322 227 292 302 266 318 410 313
Convicted 225 256 284 272 362 188 243 306 261 241 306 311
Awaiting trial as of 12/31 84 135 109 67 99 91 106 89 121 139 168 134
Totals
Charged 1,208 1,276 1,348 1,452 1,371 1,051 1,057 1,134 1,087 1,150 1,213 1,163
Convicted 1,026 1,081 1,149 1,194 1,362 878 853 1,065 920 868 1,020 1,027
Awaiting trial as of 12/31 246 368 375 346 403 32 327 329 437 412 419 451

A more elaborate scam involves a con artist, acting as a bank official, telling the elderly person that a particular bank teller is giving out counterfeit bills and that the bank needs help in catching the teller. The elderly person goes to the teller's window and withdraws a large sum of money. The victim then gives the money to the "bank official" to be examined. The "bank official" assures the customer that the money will be redeposited in his or her account; of course, it never is.

ENVIRONMENTAL CRIME

Environmental crime involves illegally polluting the air, water, or ground. Sometimes firms dump hazardous materials and waste. To investigate properly, local, state, national, and international agencies often need to cooperate. It is not unusual for environmental criminals to transport hazardous waste across state or international borders for disposal in places with less stringent environmental enforcement. Even when a problem is known to exist, environmental crime cases are often difficult to prosecute due to their complex nature. The ramifications of pollution may take years to realize as pollutants become dispersed in the environment. In addition, financial penalties are often low enough to make it worth the risk for companies to flout the regulations. The more common means of enforcing environmental laws is through regulatory action by government agencies and the application of civil penalties to those who violate the regulations.

During fiscal year 2006 the Environmental Protection Agency (EPA) initiated 305 criminal complaint cases and charged 278 defendants with environmental crimes ("EPA Enforcement Cuts Total Pollution by Record 3 Billion Pounds Over Last Three YearsAir Pollution Reductions Alone Result in Health Benefits of $3.5 Billion Yearly," November 15, 2006, http://yosemite.epa.gov/). Together these defendants received a total 154 months in prison and were required to pay $43 million in fines in addition to $29 million for environmental rehabilitation. Additional enforcement actions resulted in agreements to pay $391 million to clean up 15 million cubic yards of contaminated soil and approximately 1.3 billion cubic yards of contaminated groundwater at waste sites and $4.9 billion to reduce pollution and achieve compliance with environmental laws.

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White-Collar Crime: History of an Idea

WHITE-COLLAR CRIME: HISTORY OF AN IDEA

Crimes committed by persons of respectability have drawn the attention of societies throughout history. In the United States, interest in such phenomena far antedates the first public use of the concept of white-collar crime by Edwin Sutherland. The muckraking tradition at the turn of the century produced many persons who condemned abuse of position for private gain. Sociologist E. A. Ross, in Sin and Society, drew attention to "the man who picks pockets with a railway rebate, murders with an adulterant instead of a bludgeon, burglarizes with a "rake-off" instead of a jimmy, cheats with a company prospectus instead of a deck of cards, or scuttles his town instead of his ship" (p. 7).

The varied misdeeds denoted by Ross give an early hint of both the value of the concept and the difficulties that have plagued its use. The value is essentially social and evocative. It connotes not a particular type of crime or a statutory violation, but a concern for some combination of abuse of trust, authority, status, or position. In a society whose criminal justice system deals mainly with common crimes and common offenders, it bespeaks a concern for the misdeeds of the haves rather than the have-nots, and it raises the specter of class bias in law enforcement. However, its signifying power is precisely its weakness as an analytical tool, for its meaning shifts with changes in the character of society and in the underlying values and interests of the varied scholars and policymakers who invoke it. It is thus a distinctively social, rather than legal, concept, one suffused with vagueness and ambiguity.

The evolution of white-collar crime

The legacy of Sutherland. Sutherland's interest in the topic dates at least to the 1920s, although the research resulting in his White Collar Crime was initiated during the depression years of the 1930s. The first public treatment of the subject occurred when Sutherland titled his presidential address to the American Sociological Society in 1939 "The White Collar Criminal." He was apparently drawn to the topic in his search for a general theory of crime. The usual explanations in his day (and often today) stressed poverty and other pathological social conditions, but, argued Sutherland, these factors could not be a general cause of crime if crimes were also committed by persons of respectability and high social status. In the book-length version of the speech, which appeared a decade later, Sutherland aimed simultaneously to weaken theories depending on the behavior of the deprived and the depraved, and to provide support for his own social-learning approach to crime causationthe theory of differential association.

Sutherland was rather casual in his conceptualization of white-collar crime, at times stressing social status, at times behavior carried out in an occupational role, and at times crime committed by organizations or by individuals acting in organizational capacities. The confusion is reflected in his most frequently cited definition: "White collar crime may be defined approximately as a crime committed by a person of respectability and high social status in the course of his occupation" (p. 9). His book was devoted, however, to the crimes of organizations, not of persons: seventy large corporations and fifteen public utilities. Thus, a firm basis for ambiguity had been laid. Those following Sutherland sometimes focused on persons of high status, sometimes on occupations, and sometimes on corporate bodies.

Sutherland's book described the illegalities committed by those corporations, arguing that the corporations share most of the characteristics of professional thieves: their offenses are deliberate and organized, they are often recidivists, and they show disdain for law. Needless to say, with these conclusions the book had a controversial reception. Many in the social sciences hailed it as a landmark, whereas many in law and business attacked it as misleading and distorted. The principal basis for disagreement concerned the underlying concept of crime. The "crimes" of the corporations Sutherland examined were rarely prosecuted in criminal court: they were violations of administrative rules or simply contract cases to be processed, if at all, in civil court. Many in the legal community insisted these were not crimes at all. Sutherland's answer was that businessmen were more able to influence the course of legislation; it was only their greater power (relative to the lower-class criminal) that kept their offenses out of the traditional criminal law.

The battle over definition aside, Sutherland's pioneering work stirred few fires in the two decades after its publication. Detailed studies of particular offenses, such as Donald Cressey's examination of the violation of financial trust, were the exception rather than the rule. Of the triumvirate of status, occupation, and organization that underlay Sutherland's conception, interest tended to turn away from the status dimension itself, and toward those crimes made possible because of the defendant's occupational role (Newman). Some analysts spoke not of white-collar crime but of occupational crime. Offenders studied in these terms were not exclusively of high status. They included retail pharmacists, meat inspectors, and bank tellers. Although a much-publicized case of price-fixing in the electrical industry in 1961 (Geis and Meier) helped sustain an interest in the topic of crimes committed through, and on behalf of, organizations, sustained study of organizational crime did not flower until the next decade. Criminological research and theory continued to concentrate on juvenile delinquency and violent crime.

It is unclear why Sutherland's work generated so little new research or theory, although several reasons are plausible. The massiveness of Sutherland's undertaking, as well as confusion regarding the concept itself, may have played a part. The 1950s and 1960s were not depression decades, and the problems of a younger generation occupied public and governmental attention. It had also provided more convenient, historically, for social scientists to study the weak and deprived, rather than those in more powerful positions. The symbolic and evocative nature of the concept remained, however, awaiting changing conditions for new meaning to be infused into it.

From offender to offense. Societal interest in white-collar crime grew rapidly in the 1970s, rivaling the attention street crime had received in the preceding decade. Prosecutors gave it higher priority than in the past. Targets of investigation included individual businessmen, corrupt politicians, and such corporate activities as international business bribery, the manufacture of dangerous products, and environmental pollution. The renewed interest was motivated at least in part by the discovery of corruption and other illegal practices at the highest levels of government, and by a growing sensitivity to dangerous corporate practices. The growth in interest was great enough that it could be fairly labeled a social movement (Katz, 1980).

When the pace of scholarship on white-collar crime also revived, it became evident that the wide range of phenomena suggested by the concept had to be broken down into components. Attention had focused so much on the nature of the offender that actual criminal behavior had gone unexamined. It seemed to make little sense to include under a single rubric as diverse a set of activities as bank embezzlement, land swindles, price-fixing, fraudulent loan applications, and bribery. The first important shift away from the legacy of Sutherland was accomplished by taking the offense itself as the principal object of inquiry. In the first such effort, Herbert Edelhertz proposed to define white-collar crime as "an illegal act or series of illegal acts committed by nonphysical means and by concealment and guile, to obtain money or property, to avoid payment or loss of money or property, or to obtain business or personal advantage" (p. 3). A related shift is to search for behavioral patterns that characterize different types of white-collar crime. Susan Shapiro, for example, distinguishes fraud, self-dealing, and regulatory offenses (pp. 2024), and Mitchell Rothman separates frauds, takings, and collusion.

The impulse that gives rise to typological efforts is the felt need to put order into the enormous range of behaviors at issue. The statutes that define white-collar crime, passed by legislatures for various purposes at various times, are a patchwork. Important as they may be for prosecution, the legal categories are of limited value for analytic purposes. A given statutory offense may include a wide array of actual behaviors; bank embezzlement, for example, may range from a simple theft by a bank teller to a complex fraudulent loan arranged by a trust officer. Essentially the same behavior may be punished under statutes as different as those governing mail and wire fraud, securities fraud, and false claims and statements. Typologies allow one to see some of the similarities between crimes as different as bribery and price-fixing, which share the element of collusive activity.

The underlying assumption of this type of analysisstill to be provedis that parallels in behavior may suggest parallels in either the causal processes producing such behavior or in the methods of detection and enforcement brought to bear upon them. Such work is likely to be only partially successful until there is greater agreement on the core properties of white-collar crime. To the extent that the legal categories themselves are a function of concerns not reflected in the underlying conducta concern, for example, that the conduct be reachable by federal authorities, or that regulatory agencies can police ittypologies that concentrate on underlying conduct may be prematurely dismissive of the important role played by legal categorization itself.

From offense to organization and consequence. A second trend is to emphasize not behavior but its consequences. This trend rediscovers issues that occupied reformers at the turn of the twentieth centurya concern for the power of organizationsand the harms they commit. From the late nineteenth century on, harms caused by the production and sale of adulterated goods and similar activities were recognized as "strict liability" offensescriminal acts not requiring proof of a guilty mind. Throughout the twentieth century these activities, and many others later recognized to pose a similar threat, came increasingly to be the subject of administrative regulation, which was seen as a wiser and more effective device for protecting the public interest. Regulation expanded as new dangers to health and to life itself were recognizeddangers to individuals posed by the air they breathed, the water they drank, the food and drugs they consumed, the automobiles and other products they used, and the places at which they worked.

Rediscovery of the power of organizations to inflict physical damage as well as economic injury has led some scholars to direct their attention to specifically organizational offenses. The central concern here is those actions taken by the officials or other agents of legitimate organizations that have a serious physical or economic impact on employees, consumers, or the general public (Schrager and Short). A growing number of analysts thus speak of organizations as offenders of "organizational deviance," and of illegalities committed through the organizational form. This is a response to a society in which organizations increasingly are major actors, and although it reflects experience in the United States, both the concept of white-collar crime and a concern with corporate and governmental offenses are found throughout the world.

The focus on organizational offenses brings with it enduring issues of law and policy. One is the question of the standard by which individual conduct is to be judged. Should organizations' executives be sanctioned for failure to supervise middle-level officials engaged in wrongdoing? Should strict liability be employed, as in some of the earlier public-welfare offenses? How should sanctions be distributed between organization and employees? When the focus is on the corporate body itself, there is the question of how best to protect against harmful corporate practices without stifling organizational innovation and creativity. For example, should unwanted conduct be deterred through increased penalties against the corporation? Or is it more effective to control wrongdoing by reaching inside the organization, either through rules governing production processes and information flow, or rules regarding the composition of the board of directors? The treatment of the offenses of organizations remains fraught with complex policy choices (Coffee; Kadish; Stone).

Finally, there is the issue that sparked the original debate over the concept of white-collar crime: Are these offenses administrative rule violations or "real" crimes? The most complete follow-up study to White Collar Crime defines its subject as any act, committed by a corporation, that is punishable by the state, whether through criminal, administrative, or civil law. The title of this study, Corporate Crime, while reflecting the shift to the corporate form as a primary focus of inquiry, maintains the view that such conduct be labeled criminal (Clinard and Yeager, p. 16). The corporate sanctions examined, however, are overwhelmingly civil or administrative. Thus, the matter of definition remains controversial some forty years after Sutherland's initial exploration of white-collar crime.

White-collar crime from the enforcement perspective

White-collar crime, in either its individual or organizational form, often involves complex paper manipulations and sophisticated cover-up activities. When these traits are combined with the embeddedness of illegalities in organizations, the problems of gathering evidence with respect to motive, intent, and act are compounded. It is often extremely difficult to know who engaged in or authorized the conduct in question, what specific illegality has been committed, or whether there is a crime at all. For these reasons, crucial differences between white-collar crime and common crime appear when one examines how each is detected and prosecuted.

For common crimes, prosecution and defense are typically brought into play only after a crime has occurred and an arrest has been made; but in the case of white-collar crimes, the investigative work of prosecutors and the protective efforts of defense counsel characteristically precede, rather than follow, formal action. Indeed, from an enforcement perspective, white-collar crimes are those detected and investigated by white-collar workers, in contrast to the men in blue who respond to common crimes (Katz, 1979). The first officials to be brought into the case are not police but, more likely, tax agents or employees of a regulatory agency. Defense counsel will be hired when the defendant first becomes aware that he is a target of an investigationtypically, long before an indictment is forthcoming. This means that white-collar crime prosecution and defense often more closely approximate complex civil litigation, with its various strategic moves to gain or shield information from the opposing side, than they do the typical common-crime case. The effect of these differences is to make prosecution of white-collar cases vastly more expensive and time-consuming than that of typical common crimes. With limited resources, prosecutors may find it difficult to justify heavy expenditures for a problematic white-collar investigation when the same resources might be devoted to a number of common-crime cases.

Sentencing of white-collar offenders is also complicated. As in common crime, most cases will be settled by a guilty plea. But sentencing is problematic because the white-collar defendant, although frequently having committed offenses of long duration and great economic magnitude, is more likely to have an exemplary prior record. Judges are torn between the desire to show such offenders leniency because of their past good citizenship, and the desire to show severity because the white-collar offender has abused a position of trust.

With the advent of determinate sentencing, sanctions for white-collar offenders have become more severe. The Federal Sentencing Commission, for example, substantially raised the sentences for white-collar offenders in order to guarantee short terms of imprisonment for offenders whom judges had previously been fining and placing on probation (Federal Sentencing Guidelines § 1A4(d) (Nov. 1998). In no other offense category did the Commission raise sentencing severity relative to pre-Guidelines averages; the appropriateness of its doing so for white-collar offenders remains a matter of intense political and academic controversy.

Thus, at each stage of the criminal justice system, white-collar offenses present a distinctive set of problems for law enforcement officials. For the legal philosopher as well as the policymaker, these differences raise questions of equality of treatment between common-crime and white-collar crime defendants, as well as questions of fundamental fairness in the operation of the criminal justice system. For the researcher, they point to the need to devote detailed attention to the comparative study of the administration of justice in white-collar-crime and common-crime cases.

Conclusion

As this review suggests, the concept of white-collar crime is in a state of disarray. Its evolution has been marked by changes in meaning that often preserve, rather than reduce, fundamental ambiguities. The term still denotes crimes of high status to some, while to others it refers to either occupational or organizational illegality. Some concentrate on the nature of the offense; others, on its consequences. The offending conduct appears in a different guise when the enforcement perspective is examined, and analysts still cannot agree whether it should be regarded as criminal.

Given this confusion, the logical solution is to abandon the concept of white-collar crime and develop separate, more neatly bounded areas of inquiry. One body of researchers might devote their attention to the relation of social status to criminality and to sentence disparity; another group, to the use of occupation in the commission of crimes. Still other investigators might study the various layers of formal organizations so as to examine how corporate offenses are conducted, and yet others might focus on regulatory agencies and their enforcement activities.

As neat as this solution might seem, it misses a fundamental point. Ambiguous since its outset, the concept of white-collar crime nevertheless appears to have enormous staying power. Why is it still in use, given its frailties? The suggestion is that the concept reflects deeply felt concerns that make psychological and social sense, even if they present logical ambiguities. The overall crime problem is commonly perceived to center on the lower echelons of society. It is the down- and-out, the unemployed, and the victims of stratification and race prejudice who constitute the bulk of those processed by the criminal justice system. White-collar crime, on the other hand, stands for all the wrongs committed by those in more advantaged positions. The source of the advantage may differ, sometimes reflecting individual status, sometimes occupational role, and sometimes organizational position. The animus that nourishes the concept is often an expression of frustration or outrage at the great imbalance of power between large organizations and their victims. Often, however, it reflects a concern for the weakening of the social fabric created when people in privileged positions destroy trust by committing crimes. Their offenses eat into the life of the community just as surely, if not as visibly, as physical assault. It is this combination of evocative features that keeps the concept of white-collar crime alive despite its flawed logical status.

When the original arguments over the meaning of the concept were at their height, the sociologist Vilhelm Aubert cautioned against efforts to decide on the concept's true meaning. White-collar crime struck him as a phenomenon highly reflective of more pervasive features of the social order. Theoretical interest lies precisely in the varying attitudes regarding such conduct held by persons from different stations in life. This view remains relevant and may well help explain the longevity of the concept. Many middle- and upper-class citizens engage in some forms of white-collar illegality while condemning others. Rather than abandoning the concept because of its logical flaws, there is a need to examine its social meaning, as well as the conditions under which the various offenses that are grouped under the "white-collar" rubric are committed, detected, and sanctioned.

Stanton Wheeler

Dan M. Kahan

See also Class and Crime; Corporate Criminal Responsibility; Crime Causation: Economic Theories; Criminal Justice System; Economic Crime: Anti-Trust Offenses; Economic Crime: Tax offenses; Federal Criminal Law Enforcement.

BIBLIOGRAPHY

Albonetti, Celesta A. "Avoidance of Punishment: A Legal-Bureaucratic Model of Suspended Sentences in Federal White-Collar Cases Prior to the Federal Sentencing Guidelines." Social Forces 78 (1999): 303329.

Aubert, Vilhelm. "White-Collar Crime and Social Structure." American Journal of Sociology 58 (1952): 263271.

Clinard, Marshall B., and Quinney, Richard. Criminal Behavior Systems. 2d ed. New York: Holt, Rinehart & Winston, 1973.

, and Yeager, Peter C. Corporate Crime. With the collaboration of Ruth B. Clinard. New York: Free Press, 1980.

Coffee, John C., Jr. "Beyond the Shut-eyed Sentry: Toward a Theoretical View of Corporate Misconduct and an Effective Legal Response." Virginia Law Review 63 (1977): 10991278.

Cohen, Albert K.; Lindesmith, Alfred; and Schuessler, Karl, eds. The Sutherland Papers. Bloomington: Indiana University Press, 1956.

Cressey, Donald R. Other People's Money: A Study in the Social Psychology of Embezzlement. New York: Free Press, 1953.

Edelhertz, Herbert. The Nature, Impact, and Prosecution of White Collar Crime. Washington, D.C.: U.S. Department of Justice, Law Enforcement Assistance Administration, National Institute of Law Enforcement and Criminal Justice, 1970.

Ermann, David M., and Lundman, Richard J. Corporate and Governmental Deviance: Problems of Organizational Behavior in Contemporary Society. 2d ed. New York: Oxford University Press, 1982.

Geis, Gilbert, and Meier, Robert F., eds. White-collar Crime: Offenses in Business, Politics, and the Professions. Rev. ed. New York: Free Press, 1977.

Kadish, Sanford H. "Some Observations on the Use of Criminal Sanctions in Enforcing Economic Regulations." University of Chicago Law Review 30 (1963): 423449.

Katz, Jack. "Legality and Equality: Plea Bargaining in the Prosecution of White-Collar and Common Crime." Law and Society Review 13, no. 2 (1979): 431459.

. "The Social Movement against White-Collar Crime." Criminology Review Yearbook, vol. 2. Edited by Egon Bittner and Sheldon L. Messinger. Beverly Hills, Calif.: Sage, 1980, pp. 161184.

Lott, John R., Jr. "Do We Punish High Income Criminals Too Heavily?" Econ. Inq. 30 (1992): 583608.

Newman, Donald J. "White-collar Crime." Law and Contemporary Problems 23 (1958): 735753.

Ross, Edward Alsworth. Sin and Society: An Analysis of Latter-day Iniquity (1907). With a letter from President Roosevelt. Reprint. Gloucester, Mass.: Peter Smith, 1965.

Rothman, Mitchell Lewis. "The Criminaloid Revisited." Ph.D. dissertation, Yale University, 1982.

Schrager, Laura Shill, and Short, James F., Jr. "Toward a Sociology of Organizational Crime." Social Problems 25 (1978): 407419.

Shapiro, Susan P. Thinking about White-Collar Crime: Matters of Conceptualization and Research. Washington, D.C.: U.S. Department of Justice, National Institute of Justice, 1980.

Stone, Christopher D. "The Place of Enterprise Liability in the Control of Corporate Conduct." Yale Law Journal 90 (1980): 177.

Sutherland, Edwin H. White Collar Crime (1949). Foreword by Donald R. Cressey. New York: Holt, 1961.

Weisburd, David; Wheeler, Stanton Waring, Elin; and Bode, Nancy. Crimes of the Middle Classes: White-Collar Offenders in the Federal Courts. New Haven, Conn.: Yale University Press, 1991.

Wheeler, Stanton; Mann, Kenneth; and Sarat, Austin. Sitting in Judgment: The Sentencing of White-Collar Criminals. New Haven, Conn.: Yale University Press, 1988.

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White-Collar Crime

WHITE-COLLAR CRIME

Financial, economic, or corporate crime, usually involvingfraudand theft, that is often carried out by sophisticated means. The result is usually economic loss for businesses, investors, and those affected by the actions of the perpetrator.

White-collar crime is a broad term that encompasses many types of nonviolent criminal offenses involving fraud and illegal financial transactions. White-collar crimes include bank fraud, bribery, blackmail, counterfeiting, embezzlement, forgery, insider trading, money laundering, tax evasion, and antitrust violations. Though white-collar crime is a major problem, it is difficult to document the extent of these crimes because the Federal Bureau of Investigation's (FBI) crime statistics collect information on only three categories: fraud, counterfeiting and forgery, and embezzlement. All other white-collar crimes are listed in an "other" category. Nevertheless, law enforcement officials agree that white-collar crime is a major problem.

Sociologist Edwin H. Sutherland coined the term in a speech to the American Sociological Association in 1939, and published the book White-Collar Crime ten years later. Sutherland argued that there were significant differences between crimes such as robbery, burglary, and murder, which he classed as "blue-collar crime," and white-collar crime. Perpetrators of blue-collar crimes were typically street criminals. Their crimes had no link to their occupations and they were typically poor. In contrast, individuals of higher economic and social status committed white-collar crimes and their crimes were linked to their socially respected professions. In addition, Sutherland noted that very few white-collar criminals occupied prison cells. Sutherland argued that white-collar criminals inflicted more harm on U.S. society than burglars and robbers, however, the justice system treated white-collar offenders with more lenience and with less consistency than street criminals.

White-collar fraud did not begin in the late twentieth century. Embezzlers, counterfeiters, stock swindlers, and con men have practiced their crimes for hundreds of years. Political corruption thrived during the nineteenth century and, for example, tarnished the administration of President ulysses s. grant. The teapot dome scandal of the mid-1920s did the same for President Warren G. Harding's administration. Overall, however, there was a lack of interest in the United States in punishing fraudulent business behavior.

The stock market crash of 1929 and the subsequent Great Depression of the 1930s began to change public and political attitudes toward white-collar crime. These types of activities also began to draw more attention thanks in part to advances in the modern media. The 1930s saw the enactment of federal laws that regulated the banking and securities industries. The securities and exchange commission was established in 1934 to protect investors from illegal stock manipulation, insider trading, and other white-collar offenses perpetrated by stockbrokers. Though the SEC has not always succeeded in policing these white-collar crimes, numerous brokers and dealmakers have been prosecuted over the years.

Over the years, numerous regulations covering other areas of business have been enacted by both state and federal government. With more laws on the books violations have led to more prosecutions. The hallmark of many white-collar crimes, however, is sophistication. Perpetrators have specialized knowledge that allows them to commit complex transactions that are often difficult to identify. Law enforcement authorities rarely catch white-collar criminals at the very onset of their activities. The collapse of a business institution may reveal signs of financial irregularities that took place over many years. In addition, the use of computers and electronic financial transactions has complicated the detection and prosecution of white-collar crimes. Though law enforcement may be able to reconstruct electronic records and chains of events, the process is laborious and costly.

organized crime has also added white-collar offenses to its repertoire of illegal activities. The federal government passed the Racketeer Influenced and Corrupt Organization (RICO) Act (18 U.S.C.A. § 1961 et seq.), in 1970 to address these types of crimes. RICO is specifically designed to punish criminal activity by business enterprises controlled by organized crime. racketeering includes a number of discrete criminal offenses, including gambling, bribery, extortion, bankruptcy fraud, mail fraud, securities fraud, prostitution, narcotics trafficking, loan sharking, and murder. The punishment for violating RICO's criminal provisions is extremely harsh. If convicted, a defendant is fined and sentenced to not more than 20 years in prison for each RICO violation. Moreover, the defendant must forfeit any interest, claim against, or property or contractual right over the criminal enterprise, as well as any property that constitutes the racketeering activity or was derived from the racketeering activity. Finally, RICO contains civil provisions that allow a party injured by a RICO defendant to recover damages from the defendant in civil court.

During the late 1990s, a number of corporations manipulated financial information and made improper financial transactions. Accounting firms helped conceal the illegal nature of these actions, which undermined investor confidence in the stock market and corporate governance in general. The corporate scandals that emerged in 2001 involved Enron, WorldCom, and the accounting firm of Arthur Andersen and were of national importance. Congress responded to these elaborate white-collar crimes by enacting the Public Company Accounting Reform and Investor Protection Act, also known as the sarbanes-oxley act (Pub.L. 107-204, 116 Stat. 745, [2002]) The act increased penalties for the white-collar crimes of mail fraud and wire fraud from a maximum of five years to 20 years in prison. It also directed the united states sentencing commission to review and amend its sentencing guidelines regarding white-collar crimes. In addition, the law makes it a crime for corporate officers to falsify financial reports. A conviction could result in a $5 million fine and 10 years in prison. Most importantly, the act created a new crime of securities fraud. A person convicted of this white-collar crime could be sentenced to 25 years in prison.

The Sarbanes-Oxley Act, apart from its substantive provisions, expressed a new recognition of the seriousness of white-collar crime.

further readings

Friedrichs, David O. 2004. Trusted Criminals: White Collar Crime in Contemporary Society. 2d ed. Belmont, Calif.: Thomson/Wadsworth.

Monks, Robert A. G., and Nell Minow, eds. 2001. Corporate Governance. 3d ed. Malden, Mass.: Blackwell.

Podgor, Ellen, and Jerold H. Israel. 1997. White Collar Crime in a Nutshell. 2d ed. St. Paul, Minn.: West Wadsworth.

Simpson, Sally S. 2002. Corporate Crime, Law, and Social Control. New York: Cambridge Univ. Press.

cross-references

Corporate Fraud; Corporations; Embezzlement; Money Laundering; Tax Evasion.

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white-collar crime

white-collar crime A term introduced by Edwin Sutherland in the 1940s in order to draw attention to the illegalities and misdeeds of ‘captains of industry’ and other middle-class members of the business world (see his ‘White-Collar Criminality’, American Sociological Review, 1940
, or White-Collar Crime, 1949
). The great value of the idea was to redress the imbalance in criminology's obsession with crimes of the working class. The concept tends to be used very broadly, to include both activities carried out by employees against their employer (embezzlement, pilfering), and activities undertaken by corporate executives on behalf of the corporation itself (such as violation of anti-trust regulations or stock-market rules). Strictly speaking the latter should more accurately be designated corporate crime.

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white-collar crime

white-collar crime, term coined by Edward Sutherland for nonviolent crimes committed by corporations or individuals such as office workers or sales personnel (see white-collar workers) in the course of their business activities. White-collar crimes include embezzlement, false advertising, bribery, unfair competition, tax evasion, and unfair labor practices.

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crime, white-collar

crime, white-collar See WHITE-COLLAR CRIME.

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White-Collar Crime

WHITE-COLLAR CRIME

In his 1939 presidential address at the annual meeting of the American Sociological Society, Edward H. Sutherland used, with great effect, the term "white-collar crime." In an interesting introduction to his discussion of Sutherland, Green (1990) noted that in 1901, 1907, and 1935, respectively, Charles Henderson, Edward Alsworth Ross, and Albert Morris had "anticipated" the ideas Sutherland had presented, after conducting much research, in 1939. Sutherland depicted a white-collar criminal as any person of high socioeconomic status who commits a legal violation in the course of his or her occupation (Green 1990). Later he defined white-collar crime as criminal acts committed by persons in the middle or upper socioeconomic groups in connection with their occupations (Sutherland 1949). Since that time, the concept has undergone some modification and "has gained widespread popularity among the public" but "remains ambiguous and controversial in criminology" (Vold and Bernard 1986). More specifically, some definitions have deleted the class of the offender as a consideration. Edelhertz (1970) defines white-collar crime as an "illegal act or series of illegal acts committed by nonphysical means and by concealment or guile, to obtain money or property, to avoid payment or loss of money or property, or to obtain business or personal advantage."

Others have attempted to refine the definition by differentiating between occupational and corporate contexts (Clinard and Quinney 1973: Clinard and Yeager 1980), clarifying the difference between and among government, corporate, organizational, and occupational crimes (Coleman 1994; Green 1990; Punch 1996) and avoiding the use of the term "crime" by substituting "law violations" that involve the violator's position of power (Biderman and Reiss, 1980). Tappan (1947) said that white-collar crimes are not "crimes" if they are not included in legal definitions.

While various writers measure the extent of white-collar crimes in terms of the number of "violations" (Clinard and Yeager 1980) or the extent of harm done to the public, business, or the environment (Punch 1996), others focus on dollar costs. Reiman (1995) modified the cost estimates of white-collar crimes by the U.S. Chamber of Commerce (1974) and made those figures applicable to 1991. Among his categories were consumer fraud, credit card and check fraud, embezzlement and pilferage, insurance fraud, receiving stolen property, and securities theft and fraud. His total amounted to $197.76 billion for 1991. Reiman noted that those figures compared favorably with Clinard's estimate of $200 billion for one year (1990) and with a similar figure reported in U.S. News and World Report (1985). Reiman notes that his own estimate, is on the conservative side but that it is "almost 6000 times the total amount taken in all bank-robberies in the US in 1991 and more than eleven times the total amount stolen in all thefts reported in the FBI Uniform Crime Reports for that year" (1995, p.111). Reiman's figures apparently do not include any of the vast amounts of money lost in the savings and loan scandal. These issues are elaborated on below.

Green (1990) states that Sutherland's three main objectives were to show that: (1) white-collar crime is real criminality because it is law-violative behavior (Sutherland asserted that civil lawsuits resulting in decisions against persons or corporations should be considered convictions and are proof of violations of law), (2) poor people are not the only ones who commit crime, and (3) his theory of differential association constituted an approach that could explain a general process characteristic of all criminality.

Sutherland held that typical crime "statistics" picturing the criminal population as made up largely of lower-class, economically underprivileged people give a false impression of noncriminality on the part of the upper classes, including respected and highly placed business and political persons (Sutherland 1949). His white-collar criminality included some of the following: misinterpretation of the financial statements of corporations, manipulation of the stock exchange, bribery of public officials to obtain desirable contracts, misrepresentation in advertising and salesmanship, embezzlement and misuse of trust funds, dishonest bankruptcies, and price-fixing. He quoted the Chicago gangster Al Capone calling such practices "legitimate rackets" (Sutherland 1949) to differentiate them from the more violent rackets of the underworld.

Sutherland held that white-collar criminals are relatively immune because of the class bias of the courts and the power of their class to influence the administration of the law. As a result of this class bias, the crimes of the "respectable" upper class generally are handled differently than are the crimes of the lower class. To compensate for this class bias, Sutherland argued that official conviction statistics must be supplemented by evidence of criminal violations from other sources, such as hearings before regulatory commissions, civil suits for damages, administrative hearings, and various other procedures outside criminal court prosecutions (Vold and Bernard, 1986).

Coleman (1994) says that because "Sutherland's work focused almost exclusively on business crimes and especially violations of federal economic regulations" and because he failed "to devote more attention to violent white-collar crimes," a debate sprang up about whether white-collar crime is really crime. Since business offenses were handled as civil or administrative matters, Sutherland's detractors suggested that white-collar criminals were not "real" criminals. Coleman states, "Had the argument focused on flammable clothes that burned helpless children," Sutherland would have been in a stronger position. Still, Coleman suggests, Sutherland would have encountered resistance. When he made his address in 1939, crime was seen as something that happened primarily among immigrants and poor people. The idea that business leaders should be considered criminals had an un-American sound to it. Moreover, corporate executives were not likely to support such ideas. Coleman holds, however, that Sutherland won the first round of this debate with the scholars who criticized him.

Tappan was one of the first to criticize Sutherland's position. Tappan, who was trained as both a lawyer and a sociologist, asserted that crime, if legally defined, was an appropriate topic of study for sociologists (1947). Accordingly, he felt that actions that were not against the law were not crimes and that persons who had not been convicted of criminal charges were not criminals. Sutherland, following Sellin (1951), held that Tappan's criterion of legal conviction was too far removed from the offense, which may go undetected, unprosecuted, and/or unconvicted (Green 1990). Burgess (1950) agreed with Tappan that Sutherland erred in failing to distinguish between civil and criminal law. However, Vold and Bernard (1986) suggest that a scientifically adequate theory of crime must explain all behaviors that have the same essential characteristics, whether or not the behavior has been defined as a crime by criminal justice agencies. Sutherland initiated his attempt to develop such a theory with his theory of differential association, which he felt could explain both lower-class and white-collar crime.

Biderman and Reiss (1980) considered white-collar crime to consist of "violations of law, to which penalties are attached, and that involve the use of a violator's position of significant power, influence, or trust in the legitimate economic or political institutional order for the purpose of illegal gain, or to commit an illegal act for personal or organizational gain." Coleman (1994) defines white-collar crime as a "violation of the law committed by a person or group of persons in the course of their otherwise respected and legitimate occupational or financial activity." Green (1990) points out that the terms "respectable" and "significant power or influence" employed in these definitions do not represent an improvement of Sutherland's definition because they are relative terms. Because of such problems, Green seems to suggest that pinpointing the white-collar criminal (person) is considerably more problematic than delineating white-collar crime. He agrees with Sutherland that white-collar crime is inexorably limited to occupational opportunity.

In their analysis of corporate violations, Clinard and Yeager (1980) say that while corporate crime is white-collar crime, occupational crime is a different type of white-collar crime. Building on earlier work by Clinard and Quinney (1973), they suggest that "occupational crime is committed largely by individuals or by small groups of individuals in connection with their occupations." They include under this type "businessmen, politicians, labor union leaders, lawyers, doctors, pharmacists, and employees who embezzle money from their employees or steal merchandise and tools. Occupational crimes encompass income tax evasion; manipulation in the sale of used cars and other products; fraudulent repairs of automobiles, television sets, and appliances; embezzlement; check-kiting; and violations in the sale of securities" (1980, p. 18).

Clinard and Yeager, in agreement with Sutherland's opinion of what constitutes law violation, say that "a corporate crime is any act committed by corporations that is punished by the state, regardless of whether it is punished under administrative, civil, or criminal law" (1980, p. 16). They also state that Sutherland conducted the first research in this area and that his book White Collar Crime (1949) should have had the title of their book: Corporate Crime.

Green has extended the work of Clinard and Quinney and Clinard and Yeager and that of others in Occupational Crime (1990). He claims that corporate crime almost always occurs within the course of one's occupation, and thus the term "occupational crime" encompasses corporate offenses. To Green, occupational crime refers to any act punishable by law that is committed through an opportunity created in the course of an occupation that is legal. Green goes on to say that the criterion of a legal occupation is necessary, since otherwise the term could include all crimes. A legal occupation, he indicates, is one that does not in itself violate any laws. Thus, the term would exclude persons with occupations that are illegal to begin with, such as bank robbers and professional con men. He lists four types of occupational crime: (1) crimes for the benefit of an employing organization, (2) crimes by officials through their state-based authority, (3) crimes by professionals in their capacity as professionals, and (4) crimes by individuals as individuals.

Coleman (1994) has noted both the tendency to redefine the concept of white-collar crime to include any nonviolent crime based on concealment or guile (Webster 1980) and the tendency to impose new terms such as "occupational crime," "corporate crime" (discussed above), "elite deviance," "corporate deviance," and "organizational crime" (not to be confused with "organized crime"). Coleman states that "the whole point behind most criminologists' concern with white collar crime is to give the same kind of attention to the crimes of the powerful and privileged that is given to common offenders." He states that the term "white-collar crime" best serves this purpose or goal and is too useful a conceptual tool to be thrown out: "Because it clearly identifies a specific problem of great concern to people around the world, 'white collar crime' has become one of the most popular phrases ever to come out of sociological research" (Coleman 1994, p. 5).

Coleman (1994) clearly acknowledges that some of the criticisms of Sutherland's original definition are valid; for example, (1) responsibility for some white-collar offenses is attributable to groups, and (2) many white-collar offenses are committed by persons from the middle levels of the status hierarchy. Coleman (1994) states that in a major respect, however, Sutherland's views seem relevant. One of the central issues in early debates about the definition of white-collar crime was whether the term should include violations of civil as well as criminal law. As the study of white-collar crime has developed over the last fifty years, many criminologists have sided with Sutherland's view that it should include both civil and criminal violations (Wheeler 1976; Schrager and Short 1978; Braithewaite 1979; Clinard and Yeager 1980; Hagar and Parker 1985).

Following the lines of other students, Coleman states that a typology of white-collar crimes is needed (1994, p. 10). He suggests that while a humanistic perspective might focus on the consequences of white-collar crimes for victims (property losses versus physical injury), a more useful typology might center on differences between offenders. Thus, he suggests a dichotomy between occupational crimes (consisting of offenses by individuals, whether employee or employer) and organizational crimes, which include both corporate and government crimes.

Poveda (1994, p. 70) asserts with some justification that the design of a typology depends on the theoretical biases of the researcher. He says that scholars need to be aware of the diversity of white-collar crime in considering explanations. Poveda suggests that there are two traditions, both of which can be traced to the initial Sutherland–Tappan debate. One school, the Sutherland school, focuses on the offender as the defining characteristic of white-collar crime. The other school emphasizes the offense as the central criterion of white-collar crime (Poveda 1994, p. 39). Both traditions are alive and well.


TRENDS IN RESEARCH: CORPORATE, OCCUPATIONAL, AND ORGANIZATIONAL CASES

Punch, Reiman, Clinard and Yeager, Green, and Coleman are unanimous that interest in white-collar crime emerged or gathered speed after the Watergate scandal in the 1970s. It does seem that while there was early excitement over Sutherland's initial 1939 address, interest quickly waned. In the late 1940s, interest in social order seemed to predominate. Clinard and Yeager (1980) reviewed the events of the 1960s and 1970s, describing the occasional corporate conspiracies and environmental abuses that came to the public's attention. They noted how the short and suspended sentences given to Watergate offenders contrasted "sharply with the 10-, 20-, 50-, and even 150-year sentences given to burglars and robbers." Reiman, beginning with the first edition The Rich Get Richer and the Poor Get Prison (1979), has been a consistent critic of the different ways in which justice has been meted out to the poor and the well to do.

Clinard and Yeager (1980), in what Punch (1996) calls the piece of research that is closest to Sutherland's legacy, conducted the first large-scale comprehensive investigation of the law violations of major firms since Sutherland's pioneering work. Sutherland (1949) conducted his study on seventy of the two-hundred largest U.S. nonfinancial corporations. The study of Clinard and Yeager (1980) involved a systematic analysis of federal administrative, civil, and criminal actions initiated or completed by twenty-five federal agencies against the 477 largest publicly owned manufacturing (Fortune 500) corporations and 105 of the largest wholesale, retail, and service corporations in the United States in the period 1975–1976. Thus, they had a total sample of 582 corporations. Clinard and Yeager found the following:

A total of 1,553 federal cases were begun against all 582 corporations during 1975 and 1976 or an average of 2.7 federal cases of violation each. Of the 582 corporations, 350 (60.1 percent) had at least one federal action brought against them, and for those firms that had at least one actions brought against them, the average was 4.4 cases. (1980, p. 113)

Six main types of violations were reported by Clinard and Yeager (1980): administrative, environmental, financial, labor, manufacturing, and unfair trade practices. Their evidence shows that "often decisions on malpractice were taken at the highest corporate levels, that records were destroyed or ingeniously doctored by executives and their accountants and that the outcomes of these decisions can have serious economic, financial, political, personal, and even physical consequences" (Punch 1996, p. 52).

Punch (1996) focused on selected cases, mainly from other countries, that bear on his hypothesis that business is crimogenic, i.e., it justifies or tolerates illegal behavior. This parallels Clarke's (1990) contention that crime and misconduct are endemic to business and that the key to understanding them lies in recognizing the structure that the business environment gives to misconduct both in terms of opportunities and in terms of how misconduct is managed. Punch states that his underlying purpose is to use his cases to "unmask the underlying logic of business and the submerged social world of the manager" (1991, p. 213). Punch states, however, that he is not asserting that most companies are guilty of criminal behavior. Indeed, he says that "there are companies which explicitly set out to conform to the law; they maintain a record of no transgressions" (p. 214). In short, Punch focuses on companies that engage in corporate deviance.

If after reviewing the works of Clinard and Yeager (1980) and Sutherland (1949), a student of crime still is inclined to conclude that the term "white-collar crime" refers to harmless or small mistakes in judgment rather than to harmful, selfish, profit-oriented motives followed by an intentional cover-up of brutal consequences, Punch sets the record straight. One of the most chilling of his cases is the Three Mile Island nuclear accident in Pennsylvania in March 1979. A series of incidents involved (1) a leaking seal, (2) leading to feedwater pumps that failed to come into operation and remove heat from the core (3) because of blocked pipes stemming from (4) valves having been left in the wrong position after routine maintenance some days earlier and (5) that could not be seen because the control switch indicator was obscured. Through further accidents, mounting tension, and delays, danger increased and a complete meltdown loomed. Then, "almost by coincidence, and perhaps because of a new shift supervisor checking the PORV [pilot-operated relief valve], the stuck relief valve was discovered. More as an act of desperation than understanding. . . the valve was shut" (p. 126). Punch then quotes Perrow (1984, p. 29):

It was fortunate that it occurred when it did; incredible damage had been done with substantial parts of the core melting, but had it remained open for another thirty minutes or so, and HPI [high-pressure injector] remained throttled back, there would have been a complete meltdown, with the fissioning material threatening to breach containment.

What Punch (1996) describes in his recounting of this case and others includes the following:

  1. Earlier warnings by an efficient inspector about the inherent dangers in nuclear plant procedures had been brushed aside; the inspector then had been subjected to strong informal control in an attempt to deflect his message.
  2. Profitability (based on the productivity of privately run industry) was the top priority, and this is a problem in most corporations.
  3. Management responds to crises such as the one described (by Perrow, Punch, and others) by keeping things running.
  4. Regulatory agencies tend to compromise rather than enforce the rules governing safety; indeed, they appear to "have a dual function both to regulate and promote an industry" (p. 255).

Among his conclusions, Punch writes:

When cleared of radioactive debris, Unit Two will remain in quarantine for thirty years until it is dismantled as planned along with Unit One, which will then have reached the end of its working life. Until 2020, then, Unit Two at Three Mile Island in the middle of the Susquehanna River will remain a silent sentinel to a disturbing case of incompetence, dishonesty, complacency, and cover-up. (pp. 134–135).

This conclusion is disturbingly similar to that made earlier by Clinard and Yeager (1980) as they noted the evasion of responsibility by many of the corporate managers in their study and the unethical climates that disregarded the public's welfare (p. 299). Punch (1996) found a similar criminal climate in cases that involved Thalidomide and its effects on pregnancy, originating in Germany; the Guiness affair in England involving illegal financial dealings; the Italian affair involving business, politics, organized crime, and the Vatican Bank; a case in the Netherlands involving deviance in a shipbuilding conglomerate; and the savings and loan scandal in the United States.

The savings and loan scandal, covering the period 1987–1992, represents one of the greatest fraud cases in the twentieth century (Mayer 1990; Pizzo et al. 1989; Thio 1998). Thio stated that this fraud cost taxpayers $1.4 trillion. Coleman (1994) explained that the rise in interest rates in the 1980s created serious economic problems for many savings and loan associations (thrifts) as their inventories of low-interest fixed-rate mortgage loans became increasingly unprofitable. The thrifts had been restricted until then by government regulations and were losing money. Punch (1996) suggests that the election of Ronald Reagan to the presidency accelerated an ideology of deregulation that held that business should be freed from undue rules and restrictions and that market forces should be given free rein to enhance competition. Deregulation of the industry did take place, and this meant that interest rates were not rigid, financing could be offered with no down payment, and loans could be given for consumer and commercial purposes. Those developments opened up opportunities for unscrupulous businesspersons who moved in and exploited the thrifts for devious purposes. Deregulation not only loosened controls but "raised the limit of federal protection on deposits to $100,000; brokers could make commissions on them, investors received higher interest rates and the S&L attracted new funds while enjoying a federal safety net" (Punch 1996, p. 16). As quoted by Punch (1996), the Federal Home Loan Bank-Board reported the following to Congress in 1988:

General Accounting Office 1989, p. 22">

Individuals in a position of trust in the institution or closely affiliated with it have, in general terms, breached their fiduciary duties; traded on inside information; usurped opportunities for profits; engaged in self-dealing; or otherwise used the institution for personal advantage. Specific examples of insider abuse include loans to insiders in excess of that allowed by regulation; high-risk speculative ventures; payment of exorbitant dividends at times when the institution is at or near insolvency; payment from institutions' funds for personal vacations, automobiles, clothing, and art; payment of unwarranted commissions and fees to companies owned by a shareholder; payment of "consulting fees" to insiders or their companies; use of insiders' companies for association business; and putting friends and relatives on the payroll of the institutions. (U.S. General Accounting Office 1989, p. 22).

Calavita and Pontell (1990) categorized these fraudulent practices as "unlawful risk-taking," "looting," and "covering-up." Their work indicates that this type of corporate crime was unlike that reported by writers such as Clinard and Yeager (1980), which was designed to enhance corporate profits; rather, the savings and loan affair revealed premeditated looting for personal gain. They called this kind of crime "a hybrid of organizational and occupational crime"; this was crime by the corporation against the corporation, encouraged by the state, and with the taxpayer as the ultimate victim (Calavita and Pontell 1991).

Those studies of corporate, organizational, and occupational crimes appear to follow Sutherland's initial focus and concerns and to establish what might be called a Sutherland school of white-collar crime. Other researchers besides those mentioned earlier have made valuable contributions to this growing field, including Geis (1968), Braithewaite (1984), and Vaughn (1983).

OFFENDERS AND OFFENSES

The focus on offenses has been referred to by Poveda (1994) as a second school of thought that follows Tappan's tradition and is distinct from Sutherland's tradition with its emphasis on the offender. Social class, of course, has always been at the center of this debate in terms of its relationship to white-collar crime. While Sutherland emphasized that many violations were committed by respectable persons in the course of their occupations, Tappan argued for the recognition of the law in defining crime. Poveda states that

the law of course specifies which acts are to be criminalized regardless of who commits them. In this view the defining characteristic of white-collar crime is the offense rather than the offender. The problem of defining white-collar crime from this perspective becomes one of deciding which subset of crimes is "white collar." By separating white-collar crime from the characteristics of the offender, white-collar crime in the legal tradition ceases to be linked to any particular social class. (1994, p. 40)

Edelhertz (1970) objected to Sutherland's assertion that white-collar crimes must occur in the course of the offender's occupation. He argued that that definition excludes offenses such as income tax evasion, receiving illegal Social Security payments, and other similar offenses, that he considered white-collar crime. Edelhertz's work suggests that the class of the offender need not be central to the concept of white-collar crime but that the offense should be the central consideration. In this respect, he reflected Tappan's stance. According to Poveda (1994), criminologists who focus on the offense have come to dominate views among workers in the justice system and have become more numerous among criminologists since Edelhertz modified Sutherland's definition in the 1970s.

Shapiro (1990) also suggests that the analysis of white-collar crime must shift from a focus on the offender to focus on the offense, particularly when violations of trust situations and norms are involved. She argues that the leniency shown to white-collar criminals accused of securities fraud has resulted from the social organization of their offenses and the problems of social control they posed rather than from class biases involving higher status.

It is relevant, then, to ask whether the laws on white-collar crime are applicable to corporations as well as to individuals. After reviewing the historical development of laws creating various white-collar crimes (embezzlement and theft, unfair competition, bribery and corruption, endangerment of consumers and workers, and environmental degradation), Coleman (1994) explained that the laws involving criminal intent have been extended to include corporations, stating that "it is now common for corporations to be charged with criminal violations of the regulatory statutes as well as more serious offenses" (p 125). As will be seen below, conviction and punishment are different matters.


CONVICTIONS AND SENTENCING

In the 1980s, Wheeler directed a series of studies at Yale University that focused on both offenders and offenses as well as on a comparison of white-collar and conventional crimes. Wheeler et al. (1982, 1988) focused on eight white-collar offenses in the federal system, which they clustered into three types organized by complexity: (1) the most organized: antitrust and securities fraud, (2) intermediate: mail fraud, false claims, credit fraud, and bribery, (3) the least organized: tax fraud and bank embezzlement. Their studies included only convicted offenses, not violations of civil or administrative regulations. They found that white-collar criminals are better educated, older, and more likely to be white and well off financially compared with conventional criminals. They also found that female white-collar offenders are more similar to conventional criminals than to their male counterparts. In an analysis of the Yale data, Daly (1989) found substantial differences between male and female white-collar offenders. Daly raised questions about whether the term "white collar" should be applied to women since they seldom committed offenses as part of a group, made less money from their crimes, and were less educated. Box (1983) suggested that female workers had fewer criminal opportunities than men. In another important tangent to their findings, Weisbund et al. (1991) argued that much white-collar crime is engaged in by middle-class individuals, revealing an unexpected source of inequality in the Justice Department.

In the area of sentencing, Wheeler and colleagues (1982) found that higher-status defendants charged with white-collar crimes were more likely to receive jail sentences than were lower-status defendants. In explanation, they suggested that because most cases against high-status defendants were never prosecuted, the few cases that were prosecuted were compelling. They also noted that the research was conducted shortly after the Watergate scandals, when judges were more attentive to misdeeds attributed to greed. In another study of sentencing and status, Hagar and Parker (1985), in an analysis of data on persons charged with criminal and noncriminal acts, observed differential sentencing of employers, managers, and workers. They found that compared with workers, managers were more likely and employers were less likely to be charged under the criminal code. Employers were instead more likely to be charged with Securities Act violations that carried less stigma and a shorter sentence. They noted that employers are in positions of power that allow them to be distanced from criminal events and obscure their involvement. Finally, they stated that Sutherland noted an "obfuscation as to responsibility" that accompanies corporate positions of power. Thus, employers face securities charges rather than criminal charges that require a demonstration of malice.

The Clinard and Yeager study (1980) did not include street criminals. The authors note that there is more leniency for corporate than for other white-collar offenders. In their study, it was found that only 4 percent of sanctions handed out for corporate violations involved criminal cases against individual executives. Of the fifty-six convicted executives in large corporations, 62.5 percent received probation, 21.4 percent had their sentences suspended, and 28.6 percent were incarcerated (p. 287). Among the latter defendents, two received six-month sentences and the remaining fourteen received sentences averaging only nine days (1980).

Relevant here are criticisms of legislation designed to control crime. Geis (1996) points out that legislation dealing with "three strikes" has given a "base on balls" to white-collar offenders and indicates an underlying class, ethnic, and racial bias that seeks to define criminals as "others" rather than confronting the more costly crimes of community leaders and the corporate world.

After reviewing a number of studies of sentencing, including studies by Shapiro, Wheeler and colleagues, Clinard and Yeager, Hagar and Parker, and Mann, Coleman concludes that "the evidence leaves little doubt that white collar offenders get off much easier than street offenders who commit crimes of similar severity" (1994, p. 157). He notes, however, that "there is some evidence that the punishment for white-collar offenses has been slowly increasing in recent years"(p. 157). Coleman still maintains that while there is increasing severity of punishment, such prosecutors remain rare. He says that "Leo Barrile [1991] concluded that only 16 cases of corporate homicide have [ever] been charged, only 9 of those made it to trial, and in only three cases were corporate agents sentenced to prison" (p. 157).

IMPLICATIONS FOR RESEARCH AND THEORY

Poveda (1994) notes that "in spite of the recent work on white collar offenses, our knowledge of white-collar crime is much more circumscribed than that of conventional crime and draws more heavily upon official crime statistics" (p. 79). He says that Wheeler and associates concluded that the vast majority of white-collar offenders are nonelite offenders who look like average Americans. Wheeler and colleagues argued that Sutherland's definition was narrowly focused on the upper class and ignored the middle group of offenders. Poveda suggests that "it is time to consider alternate approaches to gaining knowledge about white-collar crime, approaches that circumvent the official statistics." (1994, p. 79) because of the need to gather more information about crimes in large organizations. Poveda states that "large organizations have the power and resources to control public information about themselves to a much greater extent than other kinds of offenders" (1994, p. 79). He asserts that researchers will have to penetrate the curtain of secrecy that may enclose illegal behavior.

Poveda proposes that there is a need to study accidents and scandals. He cites the suggestions of Molotch and Lester (1974), who showed how routine news events are managed by political actors in society: corporations, labor unions, the president, members of Congress, and so on. These actors define issues for the public construct the news. Only accidents and scandals "penetrate this constructed reality of the news by catching these major actors off guard. While accidents are unplanned, scandals involve planned events but they must typically be disclosed by an inside informer to an organization because they involve sensitive information (Poveda 1994, p. 80). Poveda suggests that these events often reveal the incidence of white-collar crime. He says that the Challenger disaster was an "'accident' that led to disclosures of questionable judgment by the National Aeronautics and Space Administration and the Morton Thiokol Corporation" (p. 81). Punch (1996) has undertaken research that focused on accidents and scandals. This research involved case studies of the savings and loan scandal, the Three-Mile Island nuclear accident, and many others. Braithwaite has written about the drug companies and their record of fraud in testing, price-fixing, and the provision of perks for medical practitioners (Braithwaite 1984).

It is important to note that research in Britain by Clarke and in Britain, Holland, and the Untied States by Punch and others suggests that corporate, organizational, and occupational crime in the industrial world have more common elements than differences. Moreover, cybercrime, relying heavily on the Internet, has increased greatly according to a report by the British Broadcasting Corporation. Fraud employing stolen credit cards and stolen identities would appear to have worldwide similarities as a result of the growing use of the World Wide Web.

Punch has noted that researchers are increasingly targeting accidents, disasters, and scandals in the business world. He has not noticed any slackening of the calculative nature of business, as evidenced in the transfer of technology and manufacturing to developing nations. Noting the existence of, if not an increase in, the number of shrewd players on the world scene and the growth of unregulated markets, Punch expects fresh scandals not only in the United States but in eastern Europe and the Far East (1996, pp. 268, 269). There is, then, growing agreement that a focus on accidents, disasters, and scandals will provide a growing database on white-collar crime and its various types and that such a database will lead to the development of a more adequate theory of white-collar crime. This would seem to be a prerequisite for the development of an adequate system of deterrence of white-collar crime.

There seems to be agreement that criminologists are some distance away from developing an adequate theory of white-collar crime. Wheeler and associates, Yeager and associates, Poveda, Braithwaite, Coleman, and others have contributed to concept development and theory building in this field. Thus, Reed and Yeager (1996) have emphasized the need to assess how notions of self-interest become merged with corporate interests and the conditions under which these socially constructed interests lead to socially harmful outcomes. Wheeler (1992) has addressed a similar concern with motivational and situational processes that drive individuals to risk involvement in white-collar crime. Coleman also asserts that the related theoretical problems of motivation and opportunity must be understood. He considers the neutralization of ethical standards by which white-collar criminals justify their pursuit of success, the secrecy that shields corporate actions, and the opportunities provided by the legal and judicial systems essential links in the development of an understanding of this type of crime.

Braithwaite (1984) also draws on the structure of opportunity in attempting to understand organizational crime but is perhaps best known for his concept of reintegrative shaming. In his approach, he utilizes control theory, specifying the processes by which corporate offenders are encouraged to strengthen their stake in conformity. He asserts that the other kind of shaming—stigmatization—has the effect of reinforcing offenders in their criminality.

There is an apparent need for a continued focus on occupational and corporate deviance and on individual and organizational offenders in the field of white-collar crime. Interest has been growing in the field, and there is reason to believe that academic researchers, government agencies, and legislatures must communicate with one another more if progress is to be made in the important matter of constructing better deterrents to white-collar crime. However, as suggested by Punch and others, investigators must search more closely for the dark, irrational side of organizations—incompetence, neglect, ambition, greed, power—as well as for motives and structures that allow managers to practice deviance against the organization. It is clear that while many researchers argue for a focus on the organization and others emphasize the need to study individual offenders, there is a growing acceptance of the need to explore all avenues that lead to white-collar crime. Indeed, there seems to be a clamor among researchers that not only must motivation and opportunity be studied but that the subcultures that facilitate immoral behavioral structures should be analyzed to understand white-collar or any other type of crime.


references

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Box, Steven 1983 Power, Crime, and Mystification. New York: Tavistock.

Braithwaite, John 1979 Inequality Crime and Public Policy. London: Routledge and Kegan Paul.

—— 1984 Corporate Crime in the Pharmaceutical Industry. London: Routledge & Kegan Paul.

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—— 1990 "Heads I Win, Tails You Lose: Dergulation, Crime, and Crisis in the Savings and Loan Industry." Crime and Delinquency 36:309–341.

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——, and Peter C. Yeager. 1980 Corporate Crime. New York: Free Press.

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—— 1996 "A Base on Balls for White Collar Criminals." In David Shicor and Dale Seckrest, eds., Three Strikes and You're Out: Vengeance as Public Policy. Thousand Oaks, Calif.: Sage.

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Poveda, Tony 1994 Rethinking White-Collar Crime. Westport, Conn.: Praeger.

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Punch, Maurice 1996 Dirty Business: Exploring Corporate Misconduct. London: Sage.

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Webster, Wilham 1980. "An Examination of FBI Theory and Methodology Regarding White Collar Crime Investigation and Prevention." American Criminal Law Review 17:275–286.

Weisbund, D., S. Wheeler, E. Waring, and N. Bode 1991 Crimes of the Middle Classes: White Collar Offenders in the Federal Courts. New Haven, Conn.: Yale University Press.

Wheeler, Stanton 1992 "The Problem of White Collar Crime Motivation." In Kip Schlegel and David Weisbund, eds., White Collar Crime Reconsidered. Boston: Northeastern University Press.

——, and E. Waring. 1988 "White Collar Crimes and Criminals." American Criminal Law Review 25:331–357.

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—— 1976 "Trends and Problems in the Sociological Study of Crime." Social Problems. 23:523–534


James E. Teele

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White-Collar Crime

CHAPTER 7
WHITE-COLLAR CRIME

A DEFINITION

The Dictionary of Criminal Justice Data Terminology (Bureau of Justice Statistics) defines white-collar crime as "nonviolent crime for financial gain committed by means of deception by persons … having professional status or specialized technical skills."

The following is a list of the specific crimes that the Bureau of Justice includes in white-collar crime:

  • Counterfeiting is the manufacture or attempted manufacture of a copy of a negotiable instrument (coins, currency, securities, stamps, and official seals) with value set by law or possession of such a copy without authorization and with intent to defraud (cheat).
  • Embezzlement is the misappropriation (dishonest use) or illegal disposal of property trusted to an individual with intent to defraud the legal owner or intended beneficiary (someone benefiting). Embezzlement differs from fraud in that it involves a breach (violation) of trust that previously existed between the victim and the offender.
  • Forgery is the alteration of something written by another or writing something that claims to be either the act of another or to have been done at a time or place other than was, in fact, the case.
  • Fraud is the intentional misrepresentation of fact to unlawfully deprive a person of his or her property or legal rights without damage or threatened or actual injury to persons.
  • White-collar regulatory offenses is the violation of federal regulations and laws other than those listed above, including import and export (not including drug offenses), antitrust, transportation, food and drug, labor and agricultural offenses.

HOW MANY CRIMES?

Although the above crimes are not part of the Crime Index total, the FBI keeps statistics on forgery and counterfeiting, fraud, and embezzlement. According to The Measurement of White-Collar Crime Using Uniform Crime Reporting (UCR) Data (U.S. Department of Justice, Federal Bureau of Investigation, Criminal Justice Information Services Division, Washington, DC, 2002), from 1997 through 1999, some 3.8 percent of all criminal offenses reported to the FBI were white-collar crime, for a total of 5.9 million offenses. Fraud offenses comprised most of the white-collar crimes reported to the FBI between 1997 and 1999, followed by forgery and counterfeiting, embezzlement, and bribery. Between 1993 and 2002 arrests for forgery and counterfeiting increased by 8.3 percent, arrests for embezzlement rose by 49.4 percent, and arrests for fraud dropped by 10.4 percent. Despite the low percentage of white-collar crime out of all crimes, it is speculated that white-collar crime can cost far more than street crimes due to the large financial losses incurred by corporate crimes against the government, environment, and society as a whole.

As defined by the FBI, fraud is a somewhat broad category that includes the following offenses: false pretenses, swindles, confidence games, credit card/ATM fraud, impersonation, welfare fraud, and wire fraud. Between 1997 and 1999, there were a reported 61,230 false pretenses/swindle/confidence game offenses, followed by 23,308 credit card/ATM offenses, and 8,689 fraud incidents that involved impersonation. Welfare fraud and wire fraud accounted for 1,289 and 984 reported offenses, respectively, between 1997 and 1999. The FBI reports that between April 1, 1996 and September 30, 2003, they received 268,536 Suspicious Activity Reports (SAR) from banks for crimes involving check fraud, check kiting, and counterfeit checks and negotiable instruments.

WHITE-COLLAR CRIME ARRESTS

In 1929 the FBI introduced the Uniform Crime Reporting (UCR) system to collect information about crimes reported to the police. In 1982 a study of the UCR was completed and a recommendation was made to redesign the system to provide more comprehensive and detailed crime statistics. This resulted in a five-year program to update the system to become the National Incident-Based Reporting System (NIBRS), which collects data on each reported crime incident. The system currently reports on cases of homicide, forcible rape, robbery, aggravated assault, burglary, larceny-theft, motor vehicle theft, and arson. Some information about offenses, victims, offenders, and reported arrests for 21 additional crime categories is included. The NIBRS system also provides information on 46 different crimes and 11 lesser offenses, including white-collar crimes.

Under the UCR system, white-collar offenses that are measured only include fraud, forgery/counterfeiting, embezzlement, and a category for "all other crimes." The latter category does not differentiate white-collar crimes from other crimes in this category. The only information available for each of the categories is arrest information, which includes the age, sex, and race of the arrestee. Because the NIBRS system is still in transition, with some agencies still using the UCR system, the data about other white-collar crimes available from NIBRS in 1997–1999 are not representative of all agencies in the nation.

According to The Measurement of White-Collar Crime Using Uniform Crime Reporting (UCR) Data, the rate of arrest for white-collar crimes in 1997–1999 varied by offense. For fraud offenses (reported most often), the arrest rate was 131.5 arrests per 100,000 inhabitants, while embezzlement had the lowest arrest rate, at 6.5 per 100,000 inhabitants.

WHITE-COLLAR CRIME OFFENDERS AND VICTIMS

White-collar crime offenders were usually male, with the exception of embezzlers. Between 1997 and 1999 white-collar crimes were largely perpetrated by whites, who represented 70 percent or more of offenders across all categories of white-collar crime.

According to the FBI, between 1997 and 1999, businesses, financial institutions, and government and religious organizations were more likely to be the victims of fraud, counterfeiting, and embezzlement, while individuals were more likely to be the victims of bribery. There were some 143 incidents of bribery against individuals between 1997 and 1999 according to the FBI, compared to 36 against government organizations and 16 against businesses.

IDENTITY THEFT

The incidence of identity theft has risen significantly since 1999, making it one of the fastest-growing and most difficult to prevent types of crime. Thieves steal personal information from victims, such as their social security, driver's license, credit card, or other identification numbers, and then set up new bank or credit card accounts or otherwise misrepresent themselves as their victims to fraudulently obtain money. There is no central office keeping track of identity theft. There are, however, several different federal agencies—including the Federal Trade Commission (FTC) and the Social Security Administration's Office of the Inspector General—and three private consumer reporting agencies which compile figures.

The FTC was required by the Identity Theft Act to form the FTC Identity Theft Hotline and Data Clearing-house in 1999 to track incidents of this type of crime. In 1999 there were 445 calls per week to the Hotline. By June of 2001 the number of callers to the hotline had increased to 1,800 per week, a rise of about 400 percent. Total identity theft complaints received by the FTC rose from 86,212 in 2001 to 214,905 in 2003, an increase of about 150 percent in two years. Identity theft is the most common consumer fraud crime reported to the FTC, accounting for 42 percent of all such crimes.

In 2003 personal information stolen from identity theft victims was used to set up new or misuse existing credit card accounts in 33 percent of the cases. Other identity theft crimes include unauthorized use of telephone, utility, and other communications services (21 percent), bank fraud (17 percent), and employment-related fraud (11 percent). (See Table 7.1.) By 2003, 8 percent of victims reported an identity theft that resulted in the forging of a government document, such as a driver's license or social security card. About 19 percent of victims reported that they had experienced more than one type of identity theft. This accounts for the reported percentages exceeding 100 percent.

In 2003 28 percent of identity theft victims were between 18 and 29 years old, 25 percent were 30 to 39 years old, and 21 percent were from 40 to 49 years old. Those under the age of 18 and over 60 were the least likely to be targets of identity theft. (See Figure 7.1.)

According to the FTC, about 21 percent of callers to the Identity Theft Hotline reported having a personal relationship with the suspected offender. Nearly 10 percent of identity theft victims reported a family member as the suspect. Roommates and co-habitants were identified as suspects by less than three percent of callers.

Most callers to the Identity Theft Hotline stated that they did not know how their identities were stolen, and most did not discover the theft until one year after their personal information began to be misused. Victims of identity theft were sometimes unable to obtain credit or financial services, telecommunication services, or utility

Theft subtypes Percent of all victims Theft subtypes Percent of all victims
Credit card fraud: 33% Government documents or benefits fraud: 8%
New accounts19.2%Fraudulent tax return3.7%
Existing accounts12.0Driver's license issued/forged2.3
Unspecified1.4Government benefits applied/received1.3
Social Security card issued/forged0.4
Phone or utilities fraud: 21% Other government docs issued/forged0.4
Wireless—new10.4%Unspecified<0.1
Telephone—new5.6
Utilities—new3.8Loan fraud: 6%
Unauthorized chargesBusiness/personal/student loan2.3%
to existing accounts0.6Auto loan/lease2.0
Unspecified0.8Real estate loan1.0
Unspecified0.3
Bank fraud: 17%
Existing accounts8.2%Other identity theft fraud: 19%
Electronic fund transfer4.8Other11.6%
New accounts3.8Illegal/criminal2.1
Unspecified0.5Medical1.8
Internet/e-mail1.7
Employment-related fraud: 11% Apartment/house rented0.9
Employment-Related Fraud11.1%Bankruptcy0.3
Attempted identity theft: 8% Insurance0.3
Attempted identity theft8.0%Property rental fraud0.2
Child support0.2
Securities/other investments0.2
Magazines0.1
*Percentages are based on the 214,905 total victims reporting. Percentages add to more than 100 because approximately 19% of victims reported experiencing more than one type of identity theft. All victims reported experiencing at least one type of identity theft.
source: "How Victims' Information Is Misused, January 1–December 31, 2003," in National and State Trends in Fraud and Identity Theft January–December 2003, Federal Trade Commission, Washington, DC, January 22, 2004

services as the result of credit problems arising from the identity theft.

The Social Security Administration (SSA) reports that in 1998 some 11,000 complaints were received about misuse of social security numbers. In 2001 the number of complaints had risen to about 65,000. An SSA review concluded that about 81 percent of these incidents of misuse involved identity theft.

Identity theft is also used by illegal aliens. Each year thousands of aliens are stopped at the border for attempting to enter the country by using counterfeit or fraudulently obtained identity documents. The Immigration and Naturalization Service (INS) reports that 99,171 fraudulent documents were seized by their inspectors in 1998, with 114,023 being seized in 2001. The most common documents are border crossing cards and alien registration cards. To counter this trend, the Enhanced Border Security and Visa Entry Reform Act of 2002 called for all U.S. travel and entry documents to be machine-readable and contain biometric identifying information.

CORPORATE CRIME

Tracking white-collar crime, and especially corporate crime, is generally much more complicated than tracking other crimes. There often is no one single offender or one victim to report the crime. White-collar crime is often based on establishing trust between the victim and the offender before any crime is committed. Building trust expands the time frame of the crime, permitting repeated victimizations of an unsuspecting victim.

Different types of ethical violations linked to corporate crime include misrepresentation in advertising, deceptive packaging, the lack of social responsibility in television commercials, the sale of harmful and unsafe products, the sale of virtually worthless products, polluting the environment, kickbacks and payoffs, unethical influences on government, unethical competitive practices, personal gain for management, unethical treatment of workers, stealing of trade secrets, and the victimization of local communities by corporations.

Corporate crime is nothing new. In the article "Schemers and Scams: A Brief History of Bad Business" (Fortune, March 18, 2002), a brief chronology of corporate malfeasance is given, including some of the more well-known corporate crimes of the past 15 years:

  • In 1989 Charles Keating was convicted of fraudulently marketing junk bonds, which led to the collapse of Lincoln Savings and Loan. The cost to taxpayers for the bank's failure was estimated at $3.4 billion. Keating served five years of a twelve-year prison sentence.
  • In 1997 Columbia/HCA insurance company was the target of the largest-ever federal investigation into health-care scams. An $840 million Medicare-fraud settlement was agreed to in 2000. Identity theft complaints by victim age, January 1–December 31, 2003
  • In 1998 Al Dunlap, nicknamed "Chainsaw Al" in the press after taking over companies and reducing costs by firing people, was fired from Sunbeam for illicitly manufacturing earnings. He overstated revenues, booking sales, for example, on grills neither paid for nor shipped.
  • In 2001 Al Taubman, former chairman of Sotheby's auction house, was convicted of conspiracy for price-fixing at Sotheby's and Christie's auction houses.

In November 1998, 46 states collectively settled lawsuits they had brought against cigarette manufacturers to recoup the tobacco-related costs of health care paid out by state Medicaid agencies. Although the sale of tobacco products was legal, the states alleged that tobacco firms knew of the highly addictive nature of smoking yet deliberately concealed their research findings from the general public for decades while promoting tobacco use. According to the terms of the settlement, the tobacco industry agreed to pay out some $206 billion over 25 years. The states of Florida, Texas, Minnesota and Mississippi settled their lawsuits separately for some $40 billion over 25 years.

Between 2001 and 2002 there were a number of verdicts in cases brought against tobacco companies, some of them resulting in million-dollar jury awards. In March 2002 an Oregon jury found Phillip Morris liable for a smoker's death and ordered the company to pay $150 million in punitive damages. In June 2001 a California jury awarded former smoker Richard Boeken $3 billion in punitive damages, later reduced to $100 million. Also in June of 2001 a New York jury found the U.S. tobacco industry liable for "unfair and deceptive business practices" and awarded some $17.8 million to Empire Blue Cross and Blue Shield of New York for the health costs of smoking-related illnesses.

A Different Type of Crime

Corporate crime can cost billions of dollars, but because these losses are frequently spread out over so many uninformed victims, it usually does not create the same initial public impact as, for example, an armed robbery of a few hundred dollars. There often is no single person to take the blame. Corporations can be so complex and powerful that the rules of justice applied to individuals are often applied differently to business. A board of directors is not imprisoned for a corporate wrongdoing; instead, the corporation may be fined.

Despite their potential to do extensive damage, corporate crimes are not regarded with the same fear as "street crime." Personal attacks are far more frightening, even to persons who have never been physically assaulted, than the seemingly remote possibility of dying a slow death due to air pollution, or buying defective tires, or using a poorly tested drug. On the other hand, someone who has had a considerable part, or perhaps all, of their savings stolen as the result of fraud or embezzlement can face a painfully insecure future because they may no longer have the money intended to support their later years. Nonetheless, except in certain spectacular cases that receive extensive media coverage such as the savings and loan fraud of the 1980s, the consequences of corporate misbehavior are generally ignored.

Corporate Espionage

Many corporations are becoming concerned about the potential espionage activities of competing corporations. In a computerized global economy where a competitor's advantage can mean life or death for a company, trade secrets, copyrighted information, patents, and trademarks become very important. Most major companies have developed sophisticated security systems to protect their secrets. Stealing classified corporate information has become a major issue for national governments. In a 2001 report by the U.S. General Accounting Office (GAO), it was reported that the American Society for Industrial Security, which surveys Fortune 500 companies, estimated that potential losses to American businesses from theft of proprietary information were $45 billion in 2000.

Many governments have begun to use their national intelligence organizations to protect local companies from espionage by foreign companies or governments. In the United States, the Economic Espionage Act of 1996 (PL 104-294) made it a federal crime to steal trade secrets for another country.

STEALING FROM THE DEPARTMENT OF DEFENSE

The U.S. Department of Defense has a long history of lax control of its ordering and payment procedures, a serious problem in a department that spent an estimated $304 billion in 2003 and is expected to spend $314 billion in 2004 (GPO Access, March 24, 2004 [Online] http://www.gpoaccess.gov/usbudget/fy00/guide02.html [Accessed 12 July 2004]). The U.S. Department of Justice is continually looking for instances in which contractors have defrauded the government. Normally, these investigations end in agreement by the defrauding company to pay a fine.

In March of 1998 the U.S. Department of Justice announced that Unisys Corporation and Lockheed Martin Corporation would pay $3.2 million to settle allegations they had sold spare parts at inflated prices to the Department of Commerce for the NEXRAD Doppler Radar System. During the same month, the Pall Aeropower Corporation agreed to pay $2.2 million to settle allegations that it defrauded the United States by overcharging the Department of the Army for air filters for the AH-1 "Cobra" helicopter. The government also alleged that Pall had defrauded the Department of Defense on other contracts, but the settlement dismissed all allegations.

On March 30, 1998, the U.S. Department of Justice announced that Alliant Techsystems, Inc., and Hercules, Inc., had agreed to pay $4.5 million to settle allegations they illegally overcharged the Navy for labor costs on contracts implementing the Intermediate-Range Nuclear Forces (INF) Treaty. According to the complaint, "Managers at Alliant and Hercules regularly directed their employees to mischarge labor time to a number of military contracts even though management knew the employees did not devote as much time to the contract as was charged to the government." On April 23, 1998, the Justice Department reported that M/A-COM, Inc., a division of AMP Incorporated, agreed to pay $3 million to settle claims that it failed to perform some required tests on electronic components.

FALSIFYING CORPORATE DATA

The Securities and Exchange Commission (SEC) reported that falsifying corporate data, especially on financial statements, increased in the 1990s. The falsified reports included statements inflating sales, hiding ownership of the corporation, and embezzlement. In July 2003 President George W. Bush created the Corporate Fraud Task Force to oversee investigation and prosecution of crimes involving corporate fraud.

The collapse of the Enron corporation was one of the most glaring examples of corporate crime and falsification of corporate data in recent history. Enron was founded in 1985 in Houston as an oil pipeline company. As electrical power markets were deregulated in the late-1990s, Enron expanded and became an energy broker trading in electricity and other energy commodities. In effect, Enron became the middleman between power suppliers and power consumers. However, instead of simply brokering energy deals, Enron devised increasingly complex contracts with buyers and sellers that allowed Enron to profit from the difference in the selling price and the buying price of commodities such as electricity. In order to service these contracts, which were becoming increasingly speculative due to the instability of unregulated electricity prices, Enron executives created a number of so-called "partnerships"—in effect, "paper" companies whose sole function was to hide debt and make Enron appear to be much more profitable than it actually was.

On December 2, 2001, Enron filed for bankruptcy protection, listing some $13.1 billion in liabilities and $24.7 billion in assets—$38 billion less than the assets listed only two months earlier. As a result, thousands of Enron employees lost their jobs. Perhaps worse, many Enron employees—who had been encouraged by company executives to invest monies from their 401k retirement plans in Enron stock—had their retirement savings reduced to almost nothing as a result of the precipitous decline in value of Enron stock. The stock dropped from $34 dollars a share on October 16, 2001, to pennies per share as of December 2, 2001. Most chilling, Enron executives, who themselves reaped millions in profits from Enron stock, barred employees from cashing in their stock in late October when it still had some value.

According to internal emails and other inter-office communications, warnings were given to Enron executives and to its accounting firm, Arthur Andersen, that Enron was heading for financial disaster as early as a year before Enron declared bankruptcy. The beginning of the end occurred on October 16, 2001, when Enron announced a $638 billion loss for the third quarter. As a result, the value of Enron's stockholders' equity was reduced by $1.2 billion. On November 8, 2001, Enron announced that it had overstated its earnings for the past four years by as much as $585 million. It also owed some $3 billion in obligations—to be paid in company stock—to various partnerships Enron had created to offset its rising debt. By November 28, 2001, Enron's debt instruments were downgraded to junk bond status, making it impossible for Enron to forestall its collapse by borrowing more money to service its debt.

In the wake of Enron's collapse, some 10 committees in the U.S. Senate and House of Representatives began to investigate whether Enron defrauded investors by deliberately concealing financial information. The shredding of financial and inter-office documents by both Enron and its accounting firm, Arthur Andersen, was also under investigation. Meanwhile, numerous lawsuits were filed against Enron, Arthur Andersen, and former Enron executives including former Chairman Kenneth L. Lay and former CEO, Jeffrey Skilling. Former Enron Vice Chairman, Clifford Baxter, was found shot to death in his car on January 15, 2002, in an apparent suicide. News reports linked Baxter's death to his despondency over his role in the Enron scandal. Enron treasurer Ben Glisan, Jr., was convicted on conspiracy charges to commit wire and securities fraud. He was sentenced to five years in prison on September 10, 2003. Jeffrey Skilling turned himself in to authorities on February 19, 2004 to face nearly three dozen criminal charges.

On June 15, 2002, a New York jury found accounting firm Arthur Andersen guilty of obstructing justice in connection with the Enron collapse. After a six-week trial and 10 days of jury deliberations, Arthur Andersen was convicted of destroying Enron documents during an ongoing federal investigation of the company's accounting practices. During the trial, executives of Arthur Andersen testified that the documents were destroyed as the result of customary housekeeping duties, not as a means to prevent federal investigators from seeing them. As a result of the verdict, Andersen faced a fine of $500,000 and a term of probation of up to five years. In the aftermath of the Enron scandal, the 89-year-old accounting firm laid off some 7,000 employees and lost more than 650 of its 2,300 clients.

Other recent examples of alleged falsification of corporate data include the filing for bankruptcy in January 2002 of Global Crossing, a telecommunications company. In February 2002 the Securities and Exchange Commission (SEC) opened an investigation into Global Crossing and its auditor—again, the accounting firm of Arthur Andersen—for questionable accounting practices.

L. Dennis Kozlowski, the former chief executive of Tyco International Ltd., was indicted in June 2002 by a New York grand jury on charges of evading more than $1 million in sales taxes on at least six paintings valued at some $13 million. According to the indictment, Kozlowski allegedly directed New York gallery employees to ship empty cartons to the Tyco corporate headquarters in New Hampshire, where Tyco employees were instructed to sign for the "shipments." The paintings, New York's case claims, eventually ended up in Kozlowski's Manhattan apartment for his own personal use. Kozlowski is accused of trying to evade the New York City taxes that would have been owed on paintings purchased by someone in-state (paintings purchased from out-of-state are not subject to these taxes). On June 26, 2002, the Manhattan district attorney added a charge of evidence-tampering to the other charges against Kozlowski, claiming that he removed a shipping invoice from a crate of documents before it was sent to the district attorney's office. All told, Kozlowski faced 12 felony charges and one misdemeanor charge. Kozlowski's trial ended April 3, 2004 in a mistrial.

In July 2002 John Rigas, his two sons, and two other executives of the Adelphia Communications Corporation, one of the nation's largest cable television companies, were charged with wire fraud, bank fraud, and securities fraud for failing to disclose billions of dollars worth of company debt. Their deception defrauded investors, creditors, and the general public by making them believe the company was in better financial health than it was. The deception ran from 1999 to May 2002.

On November 4, 2003, Richard Scrushy, former CEO of HealthSouth, the nation's largest provider of outpatient surgery, rehabilitative healthcare services, and diagnostic imaging, surrendered to FBI agents. He faced an 85-count indictment for allegedly inflating company earnings by some $2.7 billion and falsifying financial statements to hide the fraud. He also was charged with taking some $267 million in company funds for himself. Scrushy is one of 16 HealthSouth executives under indictment for fraud.

According to Fortune Magazine (March 18, 2002), between 1992 and 2001, the Securities and Exchange Commission (SEC) filed criminal charges in 609 cases involving stock fraud or other corporate crime. Of the 609 referrals, U.S. attorneys prosecuted 187 defendants. Of those, 147 defendants were found guilty and 87 went to jail or prison. From 1997 to 2000 the SEC filed some 3,000 civil cases. Of those, 39.1 percent involved securities offerings violations, followed by 16.3 percent for insider trading, 12.2 percent for stock manipulation, 11.5 percent for financial disclosure violations, and 3.1 percent for fraud against consumers. The remaining civil cases brought by the SEC were either for contempt or for other causes of action.

BANK FRAUD

The FBI investigates incidents of financial institution fraud (FIF), including insider fraud, check fraud, mortgage and loan fraud, and financial institution failures. According to the Financial Institution Fraud and Failure Report, Fiscal Year 2003 (U.S. Department of Justice, Federal Bureau of Investigation, Washington, DC, 2003), in the early 1990s the FBI was heavily involved in investigating savings and loan failures due to insider fraud. In 1992 there were 758 financial institution failure investigations, the highest recorded. This number dropped throughout the 1990s and in 2003 only 67 cases were under investigation.

According to U.S. Department of Justice figures, the number of convictions in FIF cases declined from 1999, when 2,878 convictions were reported, to 2002, with

Cases pending Convictions1 Dollar amounts (in millions)
Total Major cases2 Total Major cases2 Indictments Recovered Restitution Fine Failed financial institutions under investigation at end of fiscal year
19867,2862,9481,957533XXXX202
19877,6223,3932,309740XXXX282
19887,3853,4462,197851XXXX357
19897,8193,6052,174791XXXX404
19907,6133,6722,4611,043XXXX530
19918,6784,3362,5599862,784$59.4$490.7$7.8670
19929,7725,0712,7511,1363,06467.1402.714.6740
199310,0885,4053,2331,4073,44689.61,333.510.5651
19949,2864,9262,9261,3482,867240.6865.010.4531
19958,6414,4132,6161,2982,880185.11,139.916.8395
19968,5744,0702,5101,2552,63067.2359.1442.7247
19978,5123,8592,5511,3422,43741.2537.125.7200
19988,5773,7092,6131,2072,69162.4491.05.5142
19998,7993,8552,8781,4882,869114.5834.377.8129
20008,6384,0812,7831,3942,87748.5589.08.099
20018,1844,3832,7021,3632,73845.8754.215.297
20027,3054,2872,3971,3282,47128.21,983.87.671
Note: Financial institutions include banks, savings and loans, and credit unions.
1Includes pre-trial diversions.
2A major case is defined as a case involving a failed financial institution, or where the amount of reported loss or exposure is $100,000 or more.
source: "Table 3.151: Financial Institution Fraud and Failure Matters Handled by the U.S. Department of Justice," in Sourcebook of Criminal Justice Statistics 2002, U.S. Department of Justice, Bureau of Justice Statistics, Washington, DC, 2003

2,397 convictions. Almost $2 billion in restitution was reported in 2002, more than double the amount for 2001. (See Table 7.2.)

With the decline of insider fraud cases, the FBI has turned its investigations to external fraud schemes involving criminals seeking to defraud financial institutions. In 2003 the FBI reported 5,869 FIF cases under investigation, some 4,000 of which were classified as major cases (loss exceeding $100,000).

FRAUD AGAINST INSURANCE COMPANIES

Annually, thousands of cases are reported involving acts of fraud against insurance companies, such as faking a death to collect life insurance, setting fire to a house to collect property insurance, or claiming injuries not actually suffered. According to "A Statistical Study of State Insurance Fraud Bureaus: A Quantitative Analysis, 1995 to 2000" (Coalition Against Insurance Fraud, May 2001), insurance fraud bureaus in 41 states received nearly 89,000 referrals involving insurance fraud in 2000, up by 5 percent from 1999. There were 21,000 more cases of fraud reported to insurance fraud bureaus in 2000 than in 1995. Four states—New York, California, New Jersey, and Florida—accounted for 73 percent of all referrals. Referrals may come from insurance companies, consumers, and government and law enforcement agencies.

In 2000 insurance fraud bureaus referred some 3,998 cases of insurance fraud for prosecution, resulting in 2,123 criminal convictions nationwide. Florida reported 386 criminal convictions for insurance fraud in 2000, followed by New York (318), Pennsylvania (276), Arizona (137), and New Jersey (90). In 2000 there were some 1,100 civil actions initiated by insurance bureaus for insurance fraud. This was down somewhat from the 1,200 civil actions brought by insurance bureaus in 1999. Still, the number of civil actions brought by insurance bureaus in 2000 was more than triple the 344 civil actions brought in 1995.

In 2002 the United States Postal Inspection Service (USPIS) arrested three Kentucky men for defrauding insurance companies out of some $13 million. They fraudulently issued life insurance policies to people suffering from AIDS. To dupe the insurance companies into insuring the AIDS victims, they arranged for the blood of healthy people to be submitted for testing instead of the blood of the actual applicants.

In March 2004 one of the largest insurance frauds of recent times was unearthed in southern California. Following a 15-month investigation by the FBI, dozens of outpatient-surgery clinics were charged with performing unnecessary surgeries on patients and then overcharging their insurance companies. The patients themselves were part of the fraud, being recruited to have surgeries performed with the promise of a share of the insurance money. Some $300 million reportedly was stolen.

FRAUD BY INSURANCE COMPANIES

In addition to the criminal attempts to swindle insurance companies, insurance companies sometimes defraud their customers. On April 30, 2001, a final settlement was reached in the class action brought against Principal Mutual Life Insurance Company by some 960,000 current and former life insurance policy holders who alleged that they were misled by false and misleading marketing materials when they purchased their policies.

In January of 2002 a preliminary settlement of $59 million was announced in a class action lawsuit brought by automobile policyholders in Georgia against Allstate Insurance Company. Policyholders alleged that Allstate failed to provide payment for the loss of an automobile's market value after an accident when paying for the repair costs of automobiles involved in accidents. Also in January 2002 a final settlement of almost $5.6 million was approved in the class action suit brought by parties in 27 states against United Services Automobile Association (USAA). As in the Allstate action, automobile policyholders alleged that USAA failed to compensate them for the loss of value of vehicles after an accident.

SECURITIES FRAUD

There are many laws regulating the securities markets—which include the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation (NASDAQ)—and the corporations who sell "securities" on the markets. These regulations require corporations to be honest with their investors about the corporations, and stockbrokers to be forthcoming with their clients.

Despite these rules, both the corporate officials who release information about their companies and the stockbrokers who help people invest in securities may knowingly lie to or hide information from consumers in order to raise the stock level of a company for their own profit. Corporations may commit this type of fraud by releasing false information to the financial markets through news releases, quarterly and annual reports, SEC filings, market analyst conference calls, proxy statements, and prospectuses. Brokers may commit this type of fraud by failure to follow clients' instructions when directed, misrepresentation or omission of information, unsuitable recommendations or investments, unauthorized trades, and excessive trading (churning). Since brokerage analysts' recommendations to clients may affect the fees earned by the firms' investment banking operations, it may be profitable for the analysts to play up the value of certain stocks.

The Stanford Law School Securities Class Action Clearinghouse, in cooperation with Cornerstone Research, tracks the number of securities class action filings. In 2002 the number filed was 225, an increase of over 200 percent from the 1996 number of 108. Of these 225 filings, 113 were against firms traded on the New York Stock Exchange and 85 were against companies traded on NASDAQ. There were 53 filings in New York, 43 in California, and 22 in Delaware. Companies in the communications industry were most often filed against (58), followed by those in the noncyclical consumer industry (47) and finance (33). The most common allegations made were misrepresentation in financial documents and false forward-looking statements.

In addition to the traditional securities class action filings, two new types of securities class filings have been introduced. "IPO Allocation" filings allege misconduct in the allocation of Initial Public Offering (IPO) stock, that is, stock for companies going public for the first time. In 2001 there were 312 IPO Allocation filings recorded. In 2002 "Analyst" filings were introduced. These filings allege that investment banks or individual securities analysts at such banks issued biased research reports or ratings on companies. These reports were not based on factual information and did not disclose conflicts of interest. Numbers for Analyst filings have not yet been tracked by the Clearinghouse.

In May 2002 the stock brokerage company Merrill Lynch agreed to settle a case brought against it by the New York Attorney General Eliot Spitzer, for allegedly hyping certain stocks publicly in order to gain banking business while privately criticizing the stocks to others. The settlement amount agreed to by Merrill Lynch was $100 million. In addition to the monetary sum, Merrill Lynch must now include a warning on its stock recommendations to advise investors that it may be doing business with the companies whose stock it is rating.

Oil and Gas Investment Frauds

While many oil and gas investments are legitimate, this area is well-known for fraudulent offers. Oil- and gas-well deals are sometimes offered by "boiler rooms," or fly-by-night operations that consist of nothing more than bare office space and a dozen or so desks and telephones. Boiler room operators employ telephone solicitors trained to use high-pressure sales tactics. These con artists make repeated unsolicited telephone calls in which they follow a carefully scripted sales pitch that guarantees high profits. Some swindlers surround themselves with the trappings of legitimacy, including professionally designed color brochures.

In a fraudulent oil and gas scheme, scam artists promoting the investment often offer limited partnership interests to prospective investors who live outside the state where the well is located and outside the state the scam artists are calling from. This distance reduces chances for an investor to visit the site of a well or what may be nonexistent company headquarters.

Individuals subjected to a high-pressure sales pitch in an unsolicited telephone call should watch for the following tip-offs that they may be dealing with a swindler:

  • The oil well investment "can't miss."
  • Very little risk is involved.
  • The promoter has hit oil or gas on every other well previously drilled.
  • A lot of oil or gas has been found in an adjacent field.
  • A large reputable oil company is already operating near the company's leased property, or planning to do so.
  • A decision must be made immediately to invest in order to assure the purchase of one of the few interests remaining unsold.
  • The deal is only available to a few lucky and specially chosen investors.
  • The salesperson has personally invested in the venture himself.
  • A tip from a reputable geologist has given the company a unique opportunity to make this venture a success.

One can reduce the risk of being swindled by being suspicious of any deal that promises a fantastic return at little risk.

TELEMARKETING FRAUD

Telemarketing is a form of direct marketing in which representatives from companies call consumers or other businesses in order to sell their goods and services. Tele-marketing services may also be tied in with other forms of direct marketing such as print, radio, or television marketing. For example, an advertisement on the television may request the viewer to call a toll-free number. The overwhelming majority of telemarketing operations are legitimate and trustworthy.

The National Fraud Information Center (NFIC) is a project of the National Consumers League, a nonprofit organization founded in 1992. The NFIC considers itself "a vital resource for consumers and law enforcement agencies in the fight against telemarketing fraud." The National Fraud Information Center reported the following swindles as the top 10 telemarketing frauds for 2003.

  • Credit Card Offers (23 percent). Individuals who would normally have difficulty getting a credit card are offered the chance to do so for a fee paid up front. Often, the credit card is never issued. (Average loss: $233)
  • Prizes/Sweepstakes (21 percent). Prize awards, often phony, are offered in exchange for a certain amount of money paid up front. (Average loss: $3,031)
  • Work at Home Plans (10 percent). The swindler offers expensive kits to launch work-at-home businesses, such as envelope stuffing, that seldom generate much, if any, income. (Average loss: $392)
  • Magazines (7 percent). Bogus magazine subscriptions are offered for an up-front fee. (Average loss: $110)
  • Advance Fee Loans (6 percent). Similar to credit card scams, for an up-front fee, loans that seldom materialize are offered to individuals who would normally not qualify for a loan through a legitimate lender. (Average loss: $1,662)
  • Lotteries/Lottery Clubs (5 percent). Individuals are told they have won, or are offered assistance to win, a lottery, often based in a foreign country. (Average loss: $5,127)
  • Buyers Clubs (4 percent). Membership to non-existent buyers clubs that purport to offer deeply discounted prices are offered for an up-front fee. (Average loss: $225)
  • Travel/Vacations (2 percent). Offers of free or discounted travel are offered but not delivered. (Average loss: $571)
  • Telephone Slamming (2 percent). Telephone customers are tricked into switching their telephone companies, often without knowing that they have agreed to the change. (Average loss: $103)
  • Business Opportunities/Franchises (2 percent). Opportunities to start a new business, guaranteed to be an easy moneymaker, are offered for a fee. (Average loss: $5,376)

Characteristics of Telemarketing Fraud Schemes

The USPIS investigates and enforces over 200 federal statutes related to crimes against the U.S. Mail, the Postal Service, and its employees. It investigates any crime that uses the U.S. Mail to further a scheme, no matter where it originated: via phone, mail, or Internet. The USPIS offers a list of guidelines that can help prevent a person from being victimized by a fraudulent telemarketing scheme. This list can be applied to any type of offer, not just tele-marketing offers.

  • The offer sounds too good to be true. An unbelievable-sounding deal probably is not legitimate.
  • High-pressure sales tactics. A swindler often refuses to take no for an answer; he has a sensible-sounding answer for your every hesitation, inquiry, or objection.
  • Insistence on an immediate decision. Swindlers often say you must make a decision "right now," and they usually give a reason, like, "The offer will expire soon."
  • You are one of just a few people eligible for the offer. Don't believe it. Swindlers often target hundreds of thousands—and sometimes millions—of solicitations to consumers across the nation.
  • Your credit card number is requested for verification. Do not provide your credit card number (or even just its expiration date) if you are not making a purchase, even if you are asked for it for "identification" or "verification" purposes, or to prove "eligibility" for the offer. If you give your card number, the swindler may make unauthorized charges to your account, even if you decide not to buy anything. Once that is done, it may be very hard to get your money back.
  • You are urged to provide money quickly. A crook may try to impress upon you the urgency of making an immediate decision by offering to send a delivery service to your home or office to pick up your check. This may be to get your money before you have a chance to think carefully about the offer and change your mind, or to avoid the possibility of mail fraud charges in the future.
  • There is no risk. All investments have some risk, except for U.S. Government obligations. And if you are dealing with a swindler, any "money-back guarantee" he or she makes will simply not be honored.
  • You are given no detailed written information. If you must send money or provide a credit card number before the telemarketer gives you the details in writing, be skeptical. Do not accept excuses such as, "It's such a new offer we don't have any written materials yet," or "You'll get written information after you pay."
  • You are asked to trust the telemarketer. A swindler, unable to get you to take the bait with all of his other gimmicks, may ask you to "trust" him. Be careful about trusting a stranger you talk to on the phone.
  • You are told you have won a prize, but you must pay for something before you can receive it. This payment can either be a requirement to purchase a minimum order of cleaning supplies or vitamins, or it can be a shipping/handling charge or a processing fee. Do not deal with a promoter who uses this tactic.

Recent Telemarketing Fraud Arrests

In 2002 the USPIS closed 40 illegal telemarketing operations. Among those companies shut down was a firm in Philadelphia which targeted businesses, offering lighting and maintenance supplies over the phone. The firm would then charge exorbitant amounts for the delivered products. The operators were doing $9.3 million in yearly business at the time they were arrested. Another case involved three Canadians who were arrested by the USPIS for calling elderly Americans claiming the victims had won Cadillacs, if they would pay upfront transportation, tax, and license fees. Some 100 victims lost an estimated $250,000 in the scheme.

On November 17, 2003, Canadians Philip Arcand and his wife, Roberta Galway, were sentenced to 10 years in prison for telemarketing fraud. Their scheme involved calling unsuspecting Americans and offering protection against credit card fraud. Their program would supposedly protect consumers from unwanted charges on their credit cards if their cards were stolen by thieves. To institute the service, the victim was asked to give out his credit card number to purchase it. Later, outrageous charges would appear on the victim's card, whether or not they had agreed to take the "protection" service. In all, some $12 million was stolen from consumers.

MAIL CRIME

The USPIS investigates a number of crimes involving the nation's mail, including mail fraud, mail theft, and the mailing of controlled substances. Between the years 1981 and 2002, arrests for mail fraud rose from 1,100 to 1,634 respectively, an increase of about 48.5 percent. The peak arrests for mail fraud (1,965) occurred in 1993. In 2002 the USPIS was also responsible for 5,858 arrests for mail theft, which includes the theft or possession of stolen mail, down from 6,364 arrests in 2001. The mailing of controlled substances such as narcotics, steroids, and drug paraphernalia accounted for 1,385 arrests by the USPIS in 2002, down from 1,662 arrests in 2001. Other crimes investigated by the USPIS in 2002 included the use of counterfeit postage, money orders, child exploitation (child pornography), and the mailing of obscene matter and sexually oriented advertisements.

Mail fraud can involve a number of different crimes against businesses, consumers, and government in which the U.S. mail system has been used. During 2002 the USPIS arrested the chief financial officer of a Minnesota company who embezzled over $14 million by approving checks to brokerage accounts he secretly controlled and using company money to buy merchandise he later resold for his own profit. In a fraud that took in $60 million, a Massachusetts firm offered to help novice inventors develop and market their ideas, charging rates of $4,000 to $12,000 for the service. Some 34,000 people were taken in by the scheme. The company head was arrested by the USPIS and sentenced to eight years in prison. In a fraud aimed at the government of New York, two owners of a construction company were charged with fraudulently obtaining $40 million by misleading the state's minority business enterprise program about the true owners of subcontractor companies.

COMPUTER CRIME

Types of Computer Crime

By the 1990s computer-assisted crime had become a major element of white-collar crime. Like corporate crime, computer crime often goes unrecorded. The National Institute of Justice defines three different types of computer crimes:

  • Computer abuse is a broad range of intentional acts that may or may not be specifically prohibited by criminal statutes. Any intentional act involving knowledge of computer use or technology…if one or more perpetrators made or could have made gain and/or one or more victims suffered or could have suffered loss.
  • Computer fraud is any crime in which a person uses the computer either directly or as a vehicle for deliberate misrepresentation or deception, usually to cover up embezzlement or theft of money, goods, services, or information.
  • Computer crime is any violation of a computer crime law.

Computer crime is faceless and bloodless, and the financial gain can be huge. A common computer crime involves tampering with accounting and banking records, especially through electronic funds transfers. These electronic funds transfers, or wire transfers, are cash management systems that allow the customer electronic access to an account, automatic teller machines, and internal banking procedures, including on-line teller terminals and computerized check processing.

Computers and their technology (printers, modems, computer bulletin boards, e-mail) are used for credit card fraud, counterfeiting, bank embezzlement, theft of secret documents, vandalism, and other illegal activities. Experts place the annual value of computer crime at anywhere from $550 million to $5 billion a year. Even the larger figure may be underestimated, because many victims try to hide the crime. Few companies want to admit their computer security has been breached and their confidential files or accounts are vulnerable. No centralized databank exists for computer crime statistics. Computer crimes are often counted under other categories such as fraud and embezzlement.

The first state computer crime law took effect in Florida in 1978. An Arizona law took effect two months later. Other states soon followed, and by 2000, Vermont was the only state without a specific computer crime provision.

In 1986 Congress passed the Computer Fraud and Abuse Act (PL 99-474) that makes it illegal to perpetrate fraud on a computer. The Computer Abuse Amendments of 1994 (PL 103-322) make it a federal crime "through means of a computer used in interstate commerce of communication…[to] damage, or cause damage to, a computer, computer system, network, information, data, or program…with reckless disregard" for the consequences of those actions to the computer owner. This law refers to someone who maliciously destroys or changes computer records or knowingly distributes a virus that shuts down a computer system. A virus program is one that resides inside another program, activated by some predetermined code to create havoc in the host computer. Virus programs can be transmitted either through the sharing of disks and programs or through electronic mail.

Computer giant Microsoft teamed with the FBI, Secret Service, and Interpol in November 2003 to announce the Anti-Virus Reward Program. Under the program, Microsoft will pay the monetary rewards for information leading to the arrest and conviction of anyone responsible for launching malicious viruses and worms on the Internet. The first two rewards were for information leading to the arrest and conviction of those responsible for the MSBlast. A worm and the Sobig virus.

CORPORATIONS AND COMPUTER CRIME.

The Computer Security Institute in San Francisco, California, conducted "The 2003 Computer Crime and Security Survey" with the participation of the FBI's San Francisco Computer Intrusion Squad. The study found that of 530 computer security practitioners from major U.S. corporations, government agencies, financial and medical institutions, and universities, some 56 percent had detected computer security breaches within the last 12 months. Three-quarters of respondents stated that their institution had suffered financial losses due to computer breaches. Financial losses of $201 million were reported by nearly half of the respondents due to breaches in their computer security.

According to the survey, the most serious financial losses resulted from the theft of proprietary information, with respondents reporting total losses of over $70 million. Denial of service, resulting in a total loss of $65 million, was the next most expensive security breach. Still, despite these significant financial losses, only 30 percent of respondents reported the computer intrusions to law enforcement. In part, this low level of reporting of computer crime to law enforcement may have to do with an unwillingness to reveal the proprietary nature of the information breached.

Survey respondents reported various types of attacks on or unauthorized uses of their computer systems. Eighty percent of respondents stated they had detected employee abuse of Internet access privileges, such as downloading pornography or pirating software. Eighty-two percent reported the detection of computer viruses, while 15 percent reported financial fraud, up from only 3 percent in 2000.

HOLDING A COMPANY HOSTAGE.

For a company, the most feared type of computer crime involves the sabotage or threatened sabotage of the company's computer system. It is almost impossible to determine how often this happens since very few companies ever report the incidents.

Most American companies of any size have become totally dependent on their computers. Management is generally unaware of how computers work and are fully dependent on their systems administrator or the person responsible for keeping the computers running. In fact, in many companies, the systems administrator might be considered the most powerful person in the company, although his or her salary and title might not indicate it. While the computer system might have a sophisticated security system, these are often only a hindrance to an experienced systems analyst.

In the computer age, several new scenarios of employee threats have generated increasing concern. A disgruntled employee might want to take revenge on the company. A systems administrator responsible for the running of the company computer system might feel unappreciated. A discontented employee might create a "logic bomb" that explodes a month after he or she has left and destroys most of the company records, bringing the company's operations to a complete halt. An unhappy or overly ambitious systems administrator might walk into the company president's office and inform her that he wants a huge bonus or the computer system will cease to exist the next morning. The company cannot fire him or her for fear he or she will carry out the threat. They cannot hurriedly bring in a replacement because, by the time he or she could understand what had been done, the system could be destroyed.

Experts recommend that to avoid such potential disasters, a company should make sure no one person has complete knowledge and responsibility for a computer system. While this strategy would provide no guarantee against catastrophe, at least such incidents would be somewhat less likely. Many companies planning to fire a systems analyst often contact computer security firms beforehand to see what they can do. Although it appears cold, callous, and humiliating (and it often is), many companies now escort laid off or fired employees to their desks, helping them collect their possessions, and then accompany them to the door. They hope this harsh procedure will eliminate any opportunity for the former employee to do harm to the company's computer system. While it may be necessary, this tactic is particularly hard on honest workers who have worked many years for the company and see this severe treatment as their reward.

Although infrequent, charges have at times been brought against those who destroy a company's computer system. In February of 1998 the U.S. Department of Justice brought charges against a former chief computer network program designer of Omega, a high-tech company that did work for NASA and the U.S. Navy. The designer had worked for the company for 11 years. After he was terminated, it was alleged that in retaliation he "intentionally caused irreparable damage to Omega's computer system by activating a 'bomb' that permanently deleted all of the company's sophisticated software programs." The loss cost the company at least $10 million in sales and contracts.

Juvenile Computer Hacking Is No Joke

Illegal accessing of a computer, known as hacking, is a crime committed frequently by juveniles. When it is followed by manipulation of the information of private, corporate, or government databases and networks, it can be quite costly. Another means of computer hacking involves creation of a "virus" program.

Cases of juvenile hacking have been going on for at least two decades and have included: six teens gaining access into more than 60 computer networks, including Memorial Sloan-Kettering Cancer Center and Los Alamos National Laboratory in 1983; several juvenile hackers accessing AT&T's computer network in 1987; and teens hacking into computer networks and Web sites for NASA, the Korean Atomic Research Institute, America Online, the U.S. Senate, the White House, the U.S. Army, and the U.S. Department of Justice in the 1990s.

In 1998 the U.S. Secret Service filed the first criminal case against a juvenile for a computer crime. The computer hacking of the unnamed perpetrator shut down the Worcester, Massachusetts, airport in 1997 for six hours. The airport is integrated into the Federal Aviation Administrative traffic system by telephone lines. The accused got into the communication system and disabled it by sending a series of computer commands that changed the data carried on the system. As a result, the airport could not function. (No accidents occurred during that time.) According to the Department of Justice, the juvenile pled guilty in return for two years' probation, a fine, and community service.

United States Attorney Donald K. Stern, lead attorney on the case against the juvenile observed that:

Computer and telephone networks are at the heart of vital services provided by the government and private industry, and our critical infrastructure. They are not toys for the entertainment of teenagers. Hacking a computer or telephone network can create a tremendous risk to the public and we will prosecute juvenile hackers in appropriate cases.…

On December 6, 2000, 18-year-old Robert Russell Sanford pled guilty to six felony charges of breach of computer security and one felony charge of aggravated theft in connection with cyber attacks on U.S. Postal Service computers. Sanford, a Canadian, was placed on five years probation, although he could have been sentenced to up to 20 years in prison. Sanford was also ordered to pay over $45,000 in restitution fines for the cyber attacks.

On September 21, 2000, a 16-year-old from Miami entered a guilty plea and was sentenced to six months detention for illegally intercepting electronic communications on military computer networks. The juvenile admitted that he was responsible for computer intrusions in August and October of 1999 into a military computer network used by the Defense Threat Reduction Agency (DTRA), an arm of the Department of Defense. The DTRA is responsible for reducing the threat against the United States from nuclear, biological, chemical, conventional and special weapons.

Vulnerability of the Defense Department

Investigators from the U.S. General Accounting Office (GAO), in a report prepared for two Congressional committees, observed that the Pentagon experienced as many as 250,000 "attacks" on its computers in 1995, probably by computer hackers cruising the Internet. The Pentagon figures imply that in 65 percent of the attempts, hackers were able to gain entry into a computer network. The investigators warned, "The potential for catastrophic damage is great, especially if terrorists or enemy governments break into the Pentagon's systems." The report stated that the military's current security program was "dated, inconsistent and incomplete."

Even after this warning, in 1998, hackers broke into unclassified Pentagon networks and altered personnel and payroll data, in what Deputy Defense Secretary John Hamre called "the most organized and systematic attack the Pentagon has seen to date." In 1999 there were a reported 22,124 cyber attacks against the Department of Defense alone, costing the government an estimated $25 billion to bolster computer security procedures in order to ward off future attacks.

Internet Fraud

The Internet is no different than any other form of potential commerce. While most businesses are honest, potential frauds abound. The Internet Fraud Complaint Center (IFCC) was founded on May 8, 2000, by the National White Collar Crime Center and the FBI to monitor the problem of Internet fraud. According to the IFCC 2002 Internet Fraud Report (National White Collar Crime Center, 2003), in 2002 the IFCC received 75,063 complaints, an increase of 445 percent from 16,838 complaints in 2000. Internet auction fraud was the most common complaint (46.1 percent), followed by nondelivery of ordered merchandise (31.3 percent), and credit and debit card fraud (11.6 percent). The FTC reports that in 2003 victims of Internet fraud lost nearly $200 million, with a median loss of $195. Some 55 percent of all fraud reported to the FTC in 2003 involved the Internet, an increase from 45 percent in 2002. Investigation and prosecution of Internet fraud is difficult because the perpetrator and victim of the crime are often hundreds or even thousands of miles away from each other. But the IFCC recommends several steps consumers can take to minimize the risk that they will be victims of fraud.

  • Before using an online auction service, learn as much as possible about how it works, what is expected from you, and what is expected from the seller.
  • Learn as much as possible about the seller of any merchandise you are buying. Be cautious if the mailing address is a post office box. Call the seller's phone number to see if it is correct and working.
  • Be aware that sellers in foreign countries operate under different laws that may be to your disadvantage if there is a later problem.
  • Never give out your social security number or driver's license number to a seller. There is no need for this information and such actions may lead to identity theft.
  • Use a credit card, which gives you the option to dispute charges later. Always make sure that the Web page is secure before giving out your credit card numbers.

ROBBING THE COMPANY

In March 1998 Gabriel Sagaz, former president of Domecq Importers, Inc., a subsidiary of Allied Domecq, P.L.C., the world's second-largest liquor company, pled guilty to fraud and avoiding income taxes. From 1989 through 1996 Sagaz and other top executives at Domecq Importers embezzled over $13 million from the company and received another $2 million in kickbacks from outside vendors.

Cooperative outside vendors would bill Domecq Importers, Inc. for goods never produced and services never performed. Sagaz and his fellow embezzlers would approve the payment of these invoices. The outside vendors would then deposit the money in accounts the criminals had set up in offshore banks. In addition Sagaz and the others took kickbacks from outside vendors to steer contracts to those vendors.

THE COMPANY ROBBING THE CONSUMER

Throughout most of the early 1990s, nine corporations colluded to fix the price of and to control an estimated $1 billion market for lysine, a widely used additive for animal feed. In September 1998 three former executives of the Archer Daniels Midland Corporation (ADM) were found guilty of having secretly met with other lysine producers to divide up marketing territories and establish prices.

Scott R. Lassar, the United States Attorney in Chicago, characterized the case as "one of the hardest-fought trials that I have ever been involved in, in terms of the firepower brought in by both sides." The case involved Michael D. Andreas, the son of ADM's owner and the one-time heir apparent to the $9.2 billion, privately owned food industry giant. In 1999 Andreas and Terrance S. Wilson were each sentenced to two years in jail and each ordered to pay a $350,000 fine. This could have been more, since the government is legally allowed to seek twice the amount gained in the crime or lost by the victims. The prosecutors asked for $25 million from Andreas; the judge set the lower fine amount instead. In September 2000 the sentences of Andreas and Wilson were changed from two years to three years and from two years to nine months, respectively. Appeals brought by the two men were rejected by the U.S. Supreme Court in November 2000. Marc Whitacre, the other executive charged, was given immunity for his help taping conversations for the FBI, but later had it revoked after it was discovered that he also embezzled $9 million from the company. He was given a nine-year sentence, which had 20 months added to it in 1999.

The U.S. government's investigation of the food and feed additive industries resulted in eight criminal cases against nine corporations. Virtually all the companies pled guilty and paid almost $200 million in fines. In 1996 ADM agreed to pay $100 million in fines. In that deal, ADM was granted immunity against charges of price-fixing in the sale of high-fructose corn syrup, a major ADM product, if it cooperated with the federal government in its investigation of the industry.

Because prices for lysine were fixed, the animal feed bought by poultry and animal producers cost more than if there had been a free market in lysine. The food producers then passed this increased price on to consumers. Some estimated the cost of the price-fixing to the nation's consumers as high as $170 million. Although ADM and the other companies paid fines, and the convicted ADM executives were likely also to pay fines, none of this loss will likely ever be directly recovered by an individual consumer.

TAX FRAUD

For most Americans, failure to pay the correct amount of taxes to the Internal Revenue Service (IRS) results in agreement to pay off the taxes in some manner. However, when the IRS believes it has found a pattern of deception designed to avoid paying taxes, criminal charges can be brought. In 2003 the Criminal Investigations Division of the IRS initiated 1,814 cases. Of those, the IRS recommended prosecution in 974 cases, and in 770 cases criminal charges were filed or brought by indictment. In 2003 the IRS reported 688 convictions for tax fraud. Of those convicted for tax fraud, 79.8 percent were incarcerated, serving an average of 28 months.

BRIBERY

Some U.S. companies often feel they operate at a disadvantage in other countries because American law prohibits U.S.-based companies from using bribes to get foreign contracts, while some forms of bribery are allowed in most other industrialized countries. Until recently, the United States was the only major national economy with such laws. In fact, many foreign companies often deducted bribes as business expenses. In many countries, especially in Asia, the unwritten rule is that a senior official will get 5 percent of a $200,000 contract and a head of state requires 5 percent of a $200 million contract. The percentage increased in the 1990s, as some officials were demanding 10 to 15 percent before a bid for services or goods could be accepted.

Many businesses and diplomats from several European countries believe that changes in their tax laws would reduce the amount of bribery; others believe that because of stiff competition, businesses would find loopholes. Some American businesses hire middlemen to conduct the bribery of foreign officials; others invite prospective clients on junkets to the United States.

FORGERY AND COUNTERFEITING

As technology advances, forgers are able to use sophisticated computers, scanners (a machine that "reads" a document and transfers it to computer coding), and laser printers to make copies of more and more documents, including counterfeit checks, identification badges, driver's licenses, even dollar bills (though the bills may not have the right feel, they can be inserted into a stack of currency and an overworked bank teller may not catch the forgery).

The manufacturing of counterfeit United States currency or altering of genuine currency to increase its value is punishable by a fine of up to $5,000 and imprisonment of up to 15 years, or both. Possession of counterfeit U.S. currency is also a crime, punishable by a fine of up to $15,000, or imprisonment of up to 15 years, or both. Counterfeiting is not limited to paper money. The illegal manufacturing of a coin in any denomination above five cents is subject to the same penalties as counterfeiting paper currency, and increasing the numismatic value of a coin is punishable by a fine of up to $2,000, or imprisonment of up to five years, or both. The level of counterfeit bills in circulation worldwide is estimated to be less than 0.02 percent of all bills, about two counterfeit bills for every 10,000 genuine bills.

In response to the growing use of computer-generated counterfeit money, the U.S. Department of the Treasury redesigned the $50 and $100 bills in the 1990s. Noting that the $20 bill was the one most counterfeited, the Department of the Treasury introduced new $5, $10, and $20 dollar bills between 1998 and 2000. These bills contain a watermark making them harder to accurately copy. Another change in currency design was introduced in October 2003, a new $20 dollar bill with shades of green, peach, and blue colors in the background. A blue eagle and metallic green eagle and shield have also been added to the bill's design. In 2004 and 2005, respectively, similar enhancements are scheduled for the $50 and $100 bills.

According to the Department of the Treasury, advances in home computer technology and desktop publishing software have made counterfeiting easier than ever, despite the new designs of U.S. currency intended as safeguards against counterfeiting. In the past, fake money required some understanding of inks and how to mix them to achieve the exact tones needed to create authentic-looking currency. With advances in ink-jet printing, however, so-called P-notes (printer notes) require no such knowledge about inks or printing. In 1995 less than 1 percent of counterfeit notes were produced using digital technology. By 2002 some 40 percent of counterfeit notes were produced in this manner. The most popular denomination counterfeited overseas is the $100 bill, while domestic counterfeiters focus on the $20 bill.

Perhaps because of the ease of using computers and printers, overall arrests for counterfeiting have risen sharply, from 1,800 in 1995 to 4,900 in 2002. About 99 percent of those arrested for counterfeiting are convicted. Meanwhile, tracking counterfeiters has become more difficult because, increasingly, bills are made in smaller batches, often to be used only occasionally.

The U.S. Secret Service reports that one half of U.S. counterfeit currency distributed in the United States originated overseas. Other international counterfeiting schemes included reproducing financial instruments including commercial checks, traveler's checks, and money orders. Advanced reprographic capabilities made possible through computer technology, plus the growth of the worldwide Web, have extended counterfeiting knowledge to criminals throughout the world.

Counterfeit Products

Counterfeiting popular name brand products is a multi-billion-dollar white-collar crime. Fake Chanel purses and Nike athletic shoes have been seized all over the world. In 2001 the GAO reported an International Chamber of Commerce estimate that counterfeit trademarked products account for 8 percent ($200 billion) of all world trade annually. Online counterfeit sales may account for $25 billion. In 1999 U.S. Customs seized a record $98.5 billion in counterfeit merchandise, reflecting an increase of $22 billion over the previous year. Relations between the United States and the People's Republic of China became strained due to the manufacture of counterfeit products in China, as well as the production of copyrighted software and compact disks. The Chinese government claimed to be initiating criminal action against such violators, but many observers wondered whether the few resulting arrests of copyright violators was nothing more than show.

A daring example of art forgery was announced by the Department of Justice on March 10, 2004. Ely Sakhai, owner of two prominent Manhattan art galleries, was charged with buying paintings by such famous artists as Marc Chagall, Henry Moore, Paul Gauguin, and Pierre-August Renoir, having expert forgeries made of them, and then selling both the forgeries and the originals to unsuspecting dealers around the world. Sakhai faces up to twenty years in prison for mail and wire fraud.

MONEY LAUNDERING

The U.S. General Accounting Office defines money laundering as "the disguising or concealing of illicit income to make it appear legitimate." Money laundering involves transferring illegally received monies into legal accounts so that when money is withdrawn from those accounts, it appears to the police or other government authorities to be legal earnings of the account or the business. When a money-laundering scheme is successful, the criminals can spend their illegally acquired money with little fear of being caught. Many of the techniques that launderers use would be perfectly legal business transactions if the source of the cash were not illegal activities.

The money-laundering scheme may be as simple as mailing a box of cash to an accomplice in another country where there is very little bank regulation. The accomplice deposits it in the local bank. The sender then writes a check on that bank and can use the money without fear of anyone knowing where the money came from. Other schemes may involve bribing a bank officer to permit illegal monies to be put in good accounts and then drawing the monies out.

Over the years, the federal government has enacted a number of laws to prevent money laundering. To prevent criminals from using financial institutions to hide or launder their illegally gained money from the authorities, the Bank Secrecy Act of 1970 required banks to report transactions involving currency of more than $10,000, the transfer of more than $10,000 into or out of the country, and any suspicious activity that may be illegal. The Money Laundering Control Act of 1986 criminalized money laundering, making it a crime to knowingly engage in any monetary transaction involving more than $10,000 obtained by criminal activity or to structure financial transactions to avoid the $10,000 reporting threshold. The Anti-Drug Abuse Act of 1988 called for banks to have stricter checks on customer identification and more stringent record keeping. The act also allowed the Treasury Department to monitor currency transactions by geographical region.

In 1994 the Money Laundering Suppression Act gave bank examiners stronger procedures for monitoring the activities of financial institutions. The Money Laundering and Financial Crimes Strategy Act of 1998 created the National Money Laundering Report, an intergovernmental national plan to coordinate all law enforcement activities against money laundering from local through federal levels. It also authorized the designation of High Intensity Financial Crime Areas, those with a high risk for money laundering or financial crimes, and Financial Crime-Free Communities, to allow law enforcement to focus their prevention efforts appropriately.

Total Laundering/racketeering (Title 18 offenses) Monetary record and reporting (Title 31 offenses)
Defendant characteristics Number Percent Number Percent Number Percent
Total 1,243 100.0% 1,021 100.0% 222 100.0%
Gender
Male91280.0%76682.0%14670.9%
Female22820.016818.06029.1
Race/ethnicity
White non-Hispanic59352.3%52156.1%7235.1%
Black non-Hispanic18616.416217.52411.7
Hispanic29225.819320.89948.3
Other625.5525.6104.9
Age
18–24 yr554.9%313.4%2411.8%
25–34 yr28625.323125.05527.0
35–44 yr35031.028630.96431.4
45–59 yr33529.728931.24622.6
60 or older1039.1889.5157.4
Citizenship
U.S. citizen86776.6%76181.9%10652.2%
Non-U.S. citizen26523.416818.19747.8
Prior criminal history*
No convictions75966.6%59663.8%16379.1%
Prior adult convictions38133.433836.24320.9
Note: Detail excludes defendants for whom a particular characteristic was not reported.
*A criminal record is limited to prior adult convictions. For some defendants in this table, it is further limited to the portion that is relevant for calculating sentences under the federal sentencing guidelines.
source: Mark Motivans, "Table 4: Characteristics of Convicted Money Laundering Defendants, 2001," in "Money Laundering Offenders, 1994–2001," in Bureau of Justice Statistics Special Report, July 2003

In 2001 the Strengthening America Act by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism, informally called the Patriot Act, strengthened laws dealing with how U.S. banks use foreign correspondent banks to transfer money into and out of the country and the financing of terrorist organizations and activities. It also outlawed bulk cash smuggling, making it illegal to take more than $10,000 in concealed cash across the border to avoid reporting requirements. In addition to these federal measures, 36 states have adopted money laundering laws since 1985.

Increased awareness of money laundering is reflected in the number of Suspicious Activity Reports (SAR) submitted by banks to the U.S. Department of the Treasury. These reports, required whenever a bank has reason to believe that a transaction of at least $5,000 involves money derived from illegal activities, increased by 206 percent from 1997 to 2001. In 2002 over 273,000 reports were filed. The states of New York, Nevada, and California had the highest SAR levels, while the highest levels for metropolitan areas were found in New York and Los Angeles.

Of the 1,243 people convicted for money laundering in 2001, 1,021 were guilty of money laundering and racketeering charges and 222 for monetary record and reporting charges. Of those convicted, 52.3 percent were white, 25.8 percent were Hispanic, and 16.4 percent were black. Males made up 80 percent of those convicted, while 76.6 percent were U.S. citizens. Two-thirds (66.6 percent) of those convicted had no prior criminal convictions. (See Table 7.3.) The average prison sentence for money laundering in 2001 was 48 months.

The GAO reported in 2001 that it estimates the amount of money laundered worldwide each year to be as high as $1 trillion. Drug traffickers launder an estimated $300 to $500 billion each year, often using supposedly respectable financial institutions. Other crimes that need money laundered are fraud offenses, securities (stocks and bonds) manipulation, illegal gambling, bribery, extortion, tax evasion, illegal arms sales, political payoffs, and terrorism. Money laundering may account for as much as 2 to 5 percent of the world's gross domestic product, according to a former Managing Director of the International Monetary Fund.

In a recent case with international scope, the FBI announced in March 2004 that they had uncovered a money laundering operation involving Colombian drug lords, a Colombian terrorist group, and criminals in at least seven countries. Beginning with the investigation of a Utah loan fraud, the FBI eventually discovered that some $5 million had been laundered through U.S. banks in eight states by an international drug ring. The FBI investigation, called "Operation Utah Powder," found that Colombian cocaine money was being laundered through U.S. banks to banks overseas using wire transfers, cashier's checks, falsified business invoices, and money orders. Authorities in Spain, the Cayman Islands, Panama, Mexico, Italy, the United Kingdom, and Latvia were soon involved in the investigation. The FBI found that the drug lords had also paid protection money to the Revolutionary Armed Forces of Colombia, the military wing of that country's Communist Party, and the United Self-Defense Forces of Colombia, a right-wing terrorist group, to guard their cocaine shipments. Four Utah residents were arrested as part of the ongoing operation.

The GAO, in Money Laundering: Rapid Growth of Casinos Makes Them Vulnerable (Washington, D.C., 1996), found that gambling was expanding rapidly across the United States. Along with this growth came a large increase in the amount of cash wagered at all casinos, which totaled about $439 billion in 1996. With this much cash changing hands, casinos may be particularly vulnerable to money laundering in the form of money from illegal activities being placed into legal gaming transactions.

Money laundering is a global problem requiring collective international efforts to combat. The United States has promoted multilateral efforts to combat money laundering. The United States and over 120 other nations signed the United Nations Convention on Transnational Organized Crime in order to combat money laundering as well as other international crimes in 2000.

The State Department is required by law (the International Narcotics Control Act of 1992, PL 102-583) to identify major money-laundering countries and to provide certain specific information for each country. The Department of State works with agencies of the Departments of the Treasury and Justice to put this information together. Countries are categorized by the degree to which they are at risk of money-laundering activities. Canada, Cayman Islands, Colombia, Germany, Hong Kong, Thailand, the United Kingdom, the United States, and Venezuela are examples of the countries placed on the high priority list.

RETAIL STORE THEFT

In the 2002 National Retail Security Survey Final Report (University of Florida, Gainesville, FL, 2003), an annual survey of retail theft prepared for the National Retail Federation, authors Richard C. Hollinger, Ph.D., and Jason L. Davis found that the average retail store surveyed in 2002 lost about 1.7 percent of its inventory to shrinkage (the industry term for the difference between the recorded value of inventory bought and sold and the value of the actual inventory at the end of the year). The shrinkage rate in 2002 was down from the 2001 rate of 1.8 percent. (See Figure 7.2.)

Shrinkage is generally attributed to shoplifting, employee theft, administrative error, or vendor fraud. Respondents to the 2002 survey reported that 48 percent of their losses were due to employee theft (up from 45.9 percent in 2001), 32 percent to shoplifting (up from 30.8 percent in 2001), 15 percent to administrative errors (down from 17.5 percent in 2001), and 5 percent to vendor fraud (down from 5.9 percent in 2001). (See Figure 7.3.)

As in previous surveys, employee theft was reported as the single most significant source of inventory shrinkage among retailers, accounting for a little over $15 billion in losses (nearly half of the total $31.3 billion in losses due to inventory shrinkage in 2002.) The highest rate of inventory shrinkage due to employee theft in 2002 was experienced in convenience stores (82.5 percent), followed by supermarkets and grocery stores (59 percent), and men's apparel retailers (57.5 percent). Office supply retailers reported a 57.4 percent rate and consumer electronics/appliances retailers reported that 57.3 percent of their inventory shrinkage was due to employee theft. The lowest rates of employee theft occurred among book and magazine vendors (33.3 percent), followed by drug retailers (40.4 percent), and cards/gifts/novelties retailers (41.4 percent) (See Figure 7.4.)

Responses to employee theft include apprehension and termination of the employee, prosecution, and civil demand or recovery. In 2002 there were 35.2 employee theft apprehensions for every $100 million in sales among retailers, an increase from the 2001 rate of 30.3. About 41 percent of all apprehensions resulted in criminal prosecution. The rate of employee theft prosecutions was 14.5 for each $100 million, and the rate of civil court actions as the result of employee thefts was 35.8 for every $100 million in sales. The average amount stolen by each employee theft incident in 2002 was about $1,341, the first decrease in a decade.

Shoplifting, the second highest source of inventory shrinkage in 2002, accounted for $10 billion in losses to American retailers in 2002. Though employee theft accounts for a larger amount of total monetary loss, there are more incidents of shoplifting than there are of employee theft. There were 134.8 shoplifting apprehensions for every $100 million in sales. Prosecution of shoplifters rose in 2002. There were 108.4 shoplifting prosecutions for every $100 million in sales in 2002, up from 92.8 shoplifting prosecutions in 2001, and 149.5 civil demands per $100 million as the result of shoplifting in 2002 compared to the 2001 rate of 133.7 civil demands per $100 million for shoplifting. The average dollar loss per shoplifting case was $207 in 2002, an increase from the 2001 average loss of $195. (See Figure 7.5.)

PUBLIC CORRUPTION

A broad definition of public corruption includes a public employee asking for money, gifts, or services in exchange for doing something such as giving a city contract or voting in a certain way. This abuse of public trust may be found wherever the interest of individuals or business and government overlap. It ranges from the health inspector who accepts a bribe from a restaurant owner or the police officer who "shakes down" the drug dealer, to the councilman or legislator who accepts money to vote a certain way. These crimes are often difficult to uncover, as often few willing witnesses are available.

Of the 27,283 people indicted for offenses involving the abuse of public office between 1973 and 2001, 11,687 (42.8 percent) were federal officials, 2,182 (7.9 percent) were state officials, and 6,526 (23.9 percent) were local officials. The rest of those indicted, 6,888 (25.2 percent), were not employed by the government. (See Table 7.4.)

Bribes, Kickbacks, and Racketeering

In May 2000 former Louisiana Governor Edwin Edwards was convicted of racketeering, extortion, mail fraud, and wire fraud in connection with a scheme to extort bribes from applicants for riverboat casino licenses. Edwards was convicted on 17 counts and his son, Stephen, was convicted on 18 counts involving the extortion of some $3 million. Two of the charges for which former Governor Edwards was convicted carried prison terms of up 20 years and fines of up to $250,000.

In April 2002 U.S. Representative James A. Traficant was convicted of taking bribes and kickbacks from businessmen and his office staff. The nine-term Ohio Democrat was found guilty of 10 federal charges, including racketeering, bribery, and fraud, and was ordered to forfeit some $96,000 acquired as the result of illegal activities. As a result of the felony conviction, Traficant faced the possibility of being expelled from the U.S. House of Representatives. Expulsion would require a two-thirds vote by House members. The only such expulsion in recent history was in 1980, when Representative Michael Myers, a Democrat from Pennsylvania, was expelled for accepting money from undercover FBI agents posing as foreign dignitaries looking to buy influence in Congress.

The charges against Traficant included filing false tax returns, receiving gifts and free labor from business persons in return for political favors, and taking cash kick-backs from members of his staff. During the trial, prosecutors also accused Traficant of lobbying for contractors in exchange for free work, including paving a barn floor, fixing a drainage system, and removing trees at Traficant's farm.

In June 2002 Providence, Rhode Island, mayor Vincent A. Cianci Jr., was found guilty by a federal jury of conspiring to run a criminal enterprise from City Hall, although he was acquitted of 11 other charges against him. Cianci's conviction for racketeering conspiracy carried a maximum penalty of 20 years in prison and up to $250,000 in fines, or both. Two co-defendants in the case were also found guilty of racketeering conspiracy.

SCAMS ON THE ELDERLY

Because senior citizens are often retired and living on fixed incomes and savings, the promise of economic security can be very alluring. As a consequence, the elderly can be particularly vulnerable to economic crimes such as fraud and confidence schemes.

Seniors are particularly vulnerable to con artists. Often, they are lonely, isolated from their families, and sometimes more willing than in earlier years to believe what they are told. Some suffer mental or physical frailties that leave them less able to defend themselves against high-pressure tactics. In addition, they may be financially insecure and may want to believe the con artist's promises of future wealth and security. Since many elderly are too embarrassed to admit that they have been fooled, many of these crimes are not reported.

Statistics on fraud against the elderly, sometimes called elder scams, are not collected by the major crime reporting agencies. In 2002 the National Fraud Information Center estimated that there were 14,000 illegal telemarketing operations in the United States, and that the elderly fell prey to unscrupulous telemarketers to the tune of $40 billion per year. Between 2002 and 2003, the 70 to 79 age group rose from 9 percent to 13 percent of all fraud victims, the steepest rise for any age group. Additionally, surveys conducted by the AARP (formerly the American Association of Retired Persons) indicated that most victims of telemarketing fraud were 50 years of age or older. In 2003 the top frauds committed against those 60 or older involved prizes/sweepstakes, lotteries/lottery clubs, and magazine sales.

Because the elderly are more likely to suffer from health-related problems such as diabetes, hypertension, arthritis, and heart disease, they can be especially susceptible to fraudulent claims for products marketed as treatments or cures for diseases. In 2001 the Federal Trade Commission initiated legal action against eight companies that used the Internet to fraudulently market medical devices, herbal products, and dietary supplements as treatments or cures for Alzheimer's disease, diabetes, arthritis and other diseases that affect senior citizens. The actions were the result of the FTC's Operation Cure.All. The initiative was to identify deceptive and misleading Internet promotions of products and services that purportedly treat or cure various diseases.

Another popular scam involves con artists calling or mailing information to elderly people announcing that they have won a free prize, but must pay postage and handling to receive it. They are told a credit card number is needed to pay these costs. The thieves then use the credit card number to buy items and to get cash. The elderly are also susceptible to repairmen who stop by and say they can fix their homes. The workers may do the repair work, but it is shoddy and overpriced. If the elderly try to complain, the repairmen are no longer in the area, possibly not even in the state.

A more elaborate scam involves a con artist, acting as a bank official, telling the elderly person that a particular bank teller is giving out counterfeit bills and that the bank needs help in catching the teller. The elderly person goes to the teller's window and withdraws a large sum of money. The victim then gives the money to the "bank official" to be examined. The "bank official" assures the customer that the money will be redeposited in his or her account; of course, it never is.

ENVIRONMENTAL CRIME

Environmental crime is a serious problem for the United States, even though the immediate consequences of an offense may not be obvious or immediately severe. Environmental crimes do have victims. The cumulative costs in environmental damage and the long range toll in illness, injury, and death may be considerable.

—Theodore M. Hammett and Joel Epstein, "Prosecuting Environmental Crime: Los Angeles County," National Institute of Justice Program Focus, 1993

Environmental crime involves illegally polluting the air, water, or ground. Sometimes firms dump hazardous materials and waste. To investigate properly, local, state, national, and international agencies often need to cooperate. It is not unusual for environmental criminals to transport hazardous waste across state or international borders for disposal in places with less stringent environmental enforcement.

According to the National Institute of Justice, several obstacles exist in prosecuting environmental crime.

Elected or appointed official
Total Federal State Local Others involved
Indicted Awaiting trial on Dec. 31 Convicted Indicted Awaiting trial on Dec. 31 Convicted Indicted Awaiting trial on Dec. 31 Convicted Indicted Awaiting trial on Dec. 31 Convicted Indicted Awaiting trial on Dec. 31 Convicted
Total 27,283 7,584 23,594 11,687 2,143 10,359 2,182 774 1,792 6,526 2,243 5,372 6,888 2,424 6,071
197319118144602481901785264271415
19743055213591513602313048780052
1975294272115354336518139159466256
1976391199260111110159303519498100277024
197753521044012932945033381576216419983144
197853020541813342915520561717212717171144
1979579178419114211025629312116315119865135
1980727213602123161317228512478216828587252
19818082317301982315987366624410221127970294
1982813186671158381474918432575823234972249
19831,076222972460*584248126652706122626577257
1984931269934408774295821522037419626297257
19851,157256997563904707920662484922126797240
19861,2082461,026596835238824712325520729284225
19871,2763681,081651118545102267624689204277135256
19881,2742881,0676298652966146927679229303109240
19891,3483751,149695126610711854269122201313109284
19901,1763001,0846151035839628792579822520871197
19911,4523461,19480314966511542772428818029267272
19921,1893801,08162413953281249223291211252126246
19931,3714031,3626271335951133913330913227232299362
19941,1653329695711244889917972489620224795182
19951,0513238785271204386123612368919122791188
19969842449024566445910940832196019020080170
19971,05732785345983392512049255118169292106243
19981,1743401,0144428541491375827790264364128278
19991,1343291,06548010146011544802379521930289306
20001,0003279384419242292379121189183256109242
20011,087437920502131414957561224110184266121261
Note: Questionnaires are sent annually to the U.S. attorneys' offices in each of the Federal judicial districts eliciting data concerning indictments and convictions during the year as well as prosecutions awaiting trial on December 31 of each year.
*The 1983 figures were reviewed to attempt to identify the reason for the substantial increase in prosecutions of federal officials. The explanation appeared to be two-fold: there had been a greater focus on federal corruption nationwide, and there appeared to have been more consistent reporting of lower-level employees who abused their office, cases that may have been overlooked in the past. For reference, the U.S. attorneys' offices were told: "For purposes of this questionnaire, a public corruption case includes any case involving abuse of office by a public employee. We are not excluding low-level employees or minor crimes, but rather focusing on the job-relatedness of the offense and whether the offense involves abuse of the public trust placed in the employee."
source: "Table 5.80: Persons Indicted, Awaiting Trial on December 31, and Convicted of Offenses Involving Abuse of Public Office, by Level of Government, 1973–2001," in Sourcebook of Criminal Justice Statistics 2002, U.S. Department of Justice, Bureau of Justice Statistics, Washington, DC, 2003
  1. Some prosecutors feel unprepared to tackle environmental cases, which are perceived as hopelessly complicated and impossible to win.
  2. Some corporate defendants regard civil penalties and one-time cleanup costs as part of doing business. Many prosecutors are now turning to civil suits only when criminal remedies are not available.
  3. Some judges are not well-informed on environmental laws or are not sensitive to the seriousness of the crimes.
  4. Individual juries may be reluctant to convict a community's business leaders and significant employers if the alleged environmental damage does not have immediate consequences.

The more common means of enforcing environmental laws is through regulatory action by the government's responsible agencies and the application of civil penalties to those who violate the regulations.

According to the U.S. Environmental Protection Agency (EPA), in fiscal year 2001 criminal charges were brought against 372 defendants for violations of environmental laws nationwide. Those found guilty were fined some $95 million and were sentenced collectively to 256 years in prison. One example of a successful criminal prosecution in fiscal year (FY) 2001 reported by the EPA, is the case of David D. Nuyen of Silver Springs, Maryland. In July 2001 Nuyen pled guilty to violations of the Lead Hazard Reduction Act and the Toxic Substances Control Act. Nuyen, who owned 15 low-income rental properties in Washington, D.C., admitted that he failed to notify tenants of lead paint hazards in one of his buildings. Nuyen was sentenced to two years in prison and fined $50,000.

In addition, the EPA reported the settlement of 222 civil actions in FY 2001, resulting in $125 million in civil penalties plus $25.5 million in settlements shared with states, including a multi-state enforcement case involving Morton International, Inc. In October 2001 the company agreed to resolve charges of violating clean air, water, and hazardous waste laws at its Moss Point, Mississippi facility. Under the terms of the settlement, Morton International agreed to pay $20 million in penalties and to spend up to $16 million on projects to enhance the environment.

In another civil action in FY 2001, the EPA reached settlements with four major refineries—Koch Petroleum, BP Amoco, Marathon Ashland Petroleum, and Motiva/Equilon/Shell. The settlements involved a total of 27 refineries in violation of hazardous air pollution laws. The EPA did not disclose the terms of the settlements. As a result of criminal prosecutions, civil actions, and administrative penalties, the EPA reported that in FY 2001 environmental violators paid a total of $4.3 billion for pollution controls and environmental clean-up.

In March 2002 the EPA and the Department of Justice announced that they had filed a civil action against Shell Pipeline Company LP and Olympic Pipeline Company in connection with a gasoline pipeline rupture near Bellingham, Washington, in 1999. The rupture released a three-inch thick layer of gasoline over a 1.33-mile stretch of creek water, resulting in a massive explosion that caused the deaths of three people, including two 10-year-old boys. The resulting fire destroyed some 2.5 miles of vegetation and created a burn zone encompassing 26 acres.

In April 2002 the Miami, Florida-based Carnival Company, which operates some 40 cruise ships, pled guilty to falsifying oil record books on several of its ships and agreed to pay $18 million in fines. The falsification of records occurred when Carnival employees ran fresh water past oil water separators, resulting in artificially low oil concentration readings that were officially recorded in the ships' oil records books. As a consequence, bilge water with higher levels of oil concentration than allowed under the law was released, threatening surrounding ocean life.

On May 13, 2002, Ashland, Inc., of Covington, Kentucky, pled guilty to negligent endangerment under the Clean Air Act for failing to properly seal a manhole cover on a sewer used to transport flammable hydrocarbons, resulting in an explosion that injured five people, one of them severely. Ashland, Inc., agreed to pay a total of $10.7 million in fines and payments to compensate the injured parties.

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White-Collar Crime

White-Collar Crime

Sociologist Edwin Sutherland (1883–1950) first coined the term "white-collar crime" around 1939 and used it for the title of a book published in 1949. White-collar crime is difficult to define because it can be committed by anyone with money and apply to many different activities. White-collar crime is illegal activity carried on within normally legal business transactions. For example, white-collar crime comes from within legal businesses such as banking, stock trading, or insurance claims. It does not include drug trafficking or smuggling, since both activities are illegal. White-collar crime is also nonviolent.

The motive of white-collar crime is personal gain. Individuals or groups may use and abuse their positions within a company to hide or steal money. White-collar crime can be committed by one individual like a car repairman charging for unnecessary work on a vehicle. Or it can involve a number of individuals in a large corporation who deceive investors (those who own stock in the company) while fattening their own bank accounts by millions of dollars.

A common term associated with white-collar crime is fraud. Fraud is the intentional deception of a person, business, or government agency for the purpose of stealing property or money, or causing financial injury in other ways. This chapter defines and describes many types of white-collar fraud, including healthcare, government, bank, telemarketing, insurance, bankruptcy, securities (stock and bonds), and corporate fraud.

Victims of white-collar crime can be an individual; a group of individuals such as customers of a stock brokerage firm; a local organization whose treasurer secretly spends its money for his own benefit (embezzling); a company like a bank whose officers use its funds for their own gain; the government cheated by the companies who win its contracts; or a large corporation whose officials purposely falsify its financial records.

White-collar crime can be prosecuted by states or by the federal government. Federal law covers a much wider range of criminal misconduct. The federal criminal justice system is better suited to deal with white-collar crimes on a large scale, cases where the crimes often have an interstate, nationwide, or international scope. The Federal Bureau of Investigation (FBI), Department of Justice, U.S. attorney general, and other federal agencies have extensive investigative and prosecuting powers to bring white-collar criminals to justice.



Healthcare fraud

According to the FBI, for many of its fifty-six field offices across the nation healthcare fraud is the number one white-collar crime. During the 1990s and into the twenty-first century the number of healthcare cases under investigation increased rapidly. Defrauding Medicare (the national healthcare insurance plan for U.S. seniors) out of millions of dollars became the primary healthcare fraud problem. Medicare health fraud has unnecessarily increased federal spending. For example, privately-owned home healthcare agencies, hospitals, nursing homes, physicians, and related healthcare professions have been found to bill Medicare for services never performed or to exaggerate expenses for more Medicare funds.

In the late 1990s the largest certified home healthcare agency in Miami, Florida, billed Medicare for services that were not provided, for unnecessary services, and for services to people not eligible for Medicare, including those who had already died. Medicare paid out $120 million for these services. After five years of investigation, twenty individuals associated with the home care agency were convicted for defrauding Medicare. The federal government estimates that over $100 billion annually in federal healthcare expenditures are for fraudulent claims. Private healthcare insurers are also victims of fraud.

In March 2004 two Orange County, California, residents were convicted of defrauding both Medicare and private health insurance companies. A Garden Grove pharmacy owner gathered patient and doctor identifications from legally filled prescriptions and used the information to submit false claims to insurance companies. He submitted claims of over $5 million. Once insurance companies caught up with him, he transferred his pharmacy to a colleague who opened another pharmacy and proceeded to charge $1 million more in false claims before being caught. Some claims involved up to twenty or more prescriptions for a single patient. Others were fake prescriptions for elderly patients written by pediatricians (children's doctors). Still other prescriptions carried the forged signature of a doctor who saw only prison inmates.

In another pharmacy related incident, millionaire pharmacist Robert R. Courtney of Kansas City, Missouri, pleaded guilty to diluting cancer fighting drugs then delivering the premixed drugs to doctors' offices for patients. Investigators found premixed chemotherapy drugs at Courtney's Research Medical Tower Pharmacy that were diluted to between 13 and 53 percent of the correct strength. A drug representative from Eli Lilly Company discovered the scam after noticing Courtney had billed physicians for much more of the drug Gemzar than Courtney had ever ordered from Lilly. Doctors use Gemzar to treat pancreatic and lung cancer.


Government fraud

Defrauding U.S. government agencies has long been a popular white-collar crime of both companies and individuals. Not only is Medicare a prime target, but much of government spending is susceptible to fraud because of the number of individuals and large sums involved. The federal government spends the nation's tax dollars in procurement (buying supplies), by awarding contracts to companies for a wide variety of needs, and for federally funded programs. The FBI watches over the procurement process to prevent private companies from overcharging the government for ordered items. The massive Departments of Agriculture, Defense, Education, Energy, Housing and Urban Development, Transportation, the General Services Administration, and National Aeronautics and Space Administration, all are aided by the FBI's watchful supervision over purchasing activities.

The government awards billions of dollars in contracts to private companies every year. Contracts range from huge dollar amounts to the relatively small—from military contracts for airplane and shipbuilding to contracts to excavate archaeology sites. Fraud often proves too tempting to pass up. In the late 1990s the government brought charges against Bay Ship Management, Inc. (BSM), which had a contract to maintain U.S. Navy vessels. BSM overcharged the navy millions in excessive fees for repair work, some for work never done. Fraudulently collected money often goes directly to company officials for luxury homes, expensive cars, and vacations.


Financial institution fraud

While armed robberies immediately catch the public's attention, the amount stolen is only a fraction of the total lost to financial institutional fraud on a yearly basis. In an attempt to protect U.S. banking, the FBI assists institutions in the identification of fraudulent schemes and aggressively pursues suspicious activity if it is reported to the agency.

Financial institution fraud, commonly called bank fraud, can range from a one-person operation at one local bank to criminal conspiracies defrauding large U.S. banking institutions. In the 1980s and early 1990s, the FBI reported that 60 percent of bank fraud involved "insider" abuse, from the bank's own employees who used institutional funds for their own use—sometimes to such an extent that the bank collapsed.

A prime example of widespread misuse of bank funds was the savings and loan industry collapse in the 1980s. Savings and loans primarily lent money to the construction and home-building industries, but bank officers at numerous institutions diverted millions of dollars, much of which was never recovered. By the time the savings and loans became aware of the missing funds, so much money had been taken the banks could no longer conduct business and were forced to closed. By the twenty-first century, financial failure cases from insider abuse had been almost entirely replaced by external or outside fraud—mostly check or loan fraud by bank customers, not employees.

Check fraud is the use of fake or doctored checks to illegally receive payment from financial institutions. Major types of check fraud include forgery and counterfeiting. Billions of dollars are lost to check fraud every year.

Check fraud generally begins with the theft of a real check—from a mailbox, the garbage, or from a home or vehicle burglary. After chemically washing out the recipient's name and the signature, the criminal signs the check and cashes it at a store or bank with false identification. This is an example of forgery. Counterfeiting means reproducing more checks to look like the original stolen check. Counterfeiting has become a criminal art that extends far beyond making fake checks.

Criminals use computer software to produce credit cards, travelers checks, payroll checks, U.S. Department of Agriculture food coupons, U.S. postage stamps, and of course, U.S. currency. Counterfeiting is easily accomplished using computers, copiers, scanners, and laser printers. Simply logging onto the Internet and entering the terms check fraud or counterfeiting into a search engine can lead to information on how to produce fraudulent documents.

Frank W. Abagnale

Frank Abagnale (1948–) has seen the criminal justice system from both sides—first as a master con (to deceive someone after gaining their confidence) and fraud (to trick someone) artist and later as an expert adviser on fraud prevention. Abagnale was raised in New York and enjoyed a comfortable upbringing. His father owned a profitable stationary store on Madison Avenue in New York City. However at sixteen years of age when his parents suddenly divorced, Frank moved into the city and began a life of sophisticated crime. For the next five years Abagnale developed numerous scams ranging from fraud such as passing bad checks to impersonating various professionals. The diverse impersonations included airline pilots for Pan Am and Trans World Airlines (TWA), a lawyer working in the Louisiana state attorney general office, a pediatrician (children's doctor) in a Georgia hospital, and a sociology professor at Brigham Young University in Utah. In five years he used eight different identities and passed bad checks in twenty-six countries amounting to over $2.5 million. He was eventually arrested in Mont-pellier, France, in 1969 while posing as a Hollywood screenwriter. Abagnale served six months in a notoriously harsh French prison and several more months in a Swedish prison before being extradited (transferred) to the United States. After briefly escaping twice from U.S. authorities, he was found guilty of numerous charges of forgery (making false documents) and sentenced to twelve years in prison.

Abagnale's life took a sudden turn while serving his sentence in a federal corrections facility in Virginia. At twenty-six years of age after only four years of confinement in the federal facility, he was released in 1974 under the condition that he assist at no pay federal law authorities in crime prevention programs to stop frauds and scams. He could teach well on the workings of a criminal mind from his firsthand experiences. Abagnale also established a successful consulting firm, Abagnale and Associates, to advise private businesses such as banks on how to design secure checks. Abagnale also went on extensive lecture tours giving advice on white-collar crime prevention. Abagnale has written numerous articles and books including Catch Me If You Can (1980), which was made into a 2002 Hollywood movie directed by Steven Spielberg, and The Art of the Steal: How to Protect Yourself and Your Business From Fraud—America's #1 Crime (2001).

Loan fraud

Check fraud is the most common form of bank fraud but the largest loss of money comes from fraudulent loans. Both banks and individuals can be victims of loan fraud. Individuals are victimized by criminals who pretend to be lenders; they often claim to be a person's only chance for obtaining a loan. These loans are written with unusually high interest rates. Interest is a charge by the lender for borrowing money, usually based on a certain percentage of the amount borrowed. If the individual is purchasing property, a lender with criminal intent may include empty blanks in the loan documents that he or she will fill in later after the victim has already signed. The cost or terms of the loan may be much higher than the victim had agreed to and sometimes a lender may offer to arrange for home repairs at inflated prices.

Loan fraud schemes often involve groups of people working together. On March 29, 2004, the FBI field office in Los Angeles, California, reported the arrest of three individuals and the hunt for a fourth who had supposedly masterminded an eight-year loan fraud scheme by using multiple stolen identities. The individuals netted more than $30 million, which they then used to continue the scheme while living extravagant lifestyles.

Those arrested in the Los Angeles fraud case had stolen the identities of real estate agents, mortgage brokers, and deceased individuals. With these identities they applied for loans using fake paycheck stubs, bank statements, income tax forms, and so forth. Once they obtained a loan they "flipped" the property, selling it at an inflated price to yet another stolen identity to obtain another loan. The criminals also took out additional loans to cash out the value of the home. Eventually, the property would fall into foreclosure (when a lender takes back property or goods after nonpayment) at a large loss to the banks who made the loans.


Telemarketing fraud

In the 1990s and early 2000s, telemarketing (selling items over the phone) fraud cost consumers billions of dollars. The typical telemarketing call would come around dinnertime with a sincere voice promising free gifts and vacations. All a person has to do to receive a prize is purchase an amazing water purifier, vitamins, or other product by credit card or check. Free prizes plus the purchase of a seemingly wonderful item seems like too good of an offer for some to turn down. Neither the purchased item nor the prize, however, would ever arrive since they never existed. The telemarketers would make up a scheme and simply take the purchaser's money. In addition, the buyers would probably end up on a list of susceptible victims passed around to other scam telemarketers. If an individual falls for a scam once, it is possible he or she will do so again.

Individuals committing telemarketing fraud use multiple names, phone numbers, addresses, product lines, and prepared scripts. They can change these overnight, making arrests difficult. The FBI reports that senior citizens are particularly vulnerable and likely to fall for scams.

While telemarketing scams still offer free prizes and vacations frequently, they prey on economic uncertainties. A favorite telemarketing fraud involves credit card loss protection. Although federal law limits an individual's legal responsibility or liability for unauthorized credit card charges to $50, fraudulent telemarketers will tell cardholders they will be held responsible or liable for all unauthorized charges. They claim everyone needs credit card loss insurance should criminals get access to a card number and charge thousands of dollars before the owner realizes it. The scammers offer loss protection insurance for a fee that can be charged to a credit card. If successful, the fraudulent telemarketer has managed to get money from the victim, as well as his or her credit card number.

Another frequently used telemarketing scam is the advance-fee loan. Telemarketers target people with poor credit and offer loans to pay off debt for a small amount of money due immediately. Once the fee is collected the scammer disappears.

Through the 1990s and early 2000s, the FBI carried out a number of successful operations against telemarketing scams. Together with retired FBI agents and volunteers from the American Association of Retired Persons posing as vulnerable elderly citizens, the FBI set up operations to catch fraudulent telemarketers. The marketers would call numbers thinking they were targeting people who had fallen for scams before. The volunteers recorded the solicitations and prosecutors were able to use these recordings to arrest the telemarketers for fraud.


Insurance fraud

Resulting in increased insurance premiums for all Americans, insurance fraud is one of the most common and costly white-collar crimes. Billions of dollars are lost yearly. This section deals with life/disability, auto, homeowners, and business/commercial insurance, but not health insurance (covered under healthcare insurance fraud). Insurance fraud can occur within an insurance company, by its own employees, or outside the company by individuals not associated with the company.

External insurance fraud is committed by policyholders or by professionals who provide assistance to those making claims. A common fraudulent activity is "padding" claims to make the loss appear more than it actually is. By overstating the damage, an individual claimant and an insurance adjuster (one who assesses the damage for the insurance company) receive a higher insurance payment than necessary. The adjuster then receives some of the payment for his or her part in the scam, generally called a "kickback."

Other aggressive schemes involve organized groups such as automobile accident rings. These crime rings file numerous accident claims involving fraudulent damage. Other fake claims involve falsifying or exaggerating disability (being unable to work due to an injury) claims. Fraudulent disability claims cost insurance companies over a billion dollars per year. Insurance scammers are even able to fraudulently collect on life insurance policies, costing hundreds of millions of dollars every year.

Internal fraud comes from within the industry through company officials, employees, and agents. One type of internal fraud is diverting insurance premiums paid by policyholders to the personal accounts of company employees. Agents may also receive policy payments and not pass them to the company. The most aggressive form of insurance fraud is creating an entirely bogus or fake company, often through offshore (not in the United States) banks owned by criminals. A victim is conned into paying premiums to the nonexistent insurance company for nonexistent coverage.


Bankruptcy fraud

The intent of U.S. bankruptcy law is to protect businesses and individuals from the loss of all their belongings and ability to earn a livelihood due to a financial failure. The number of bankruptcy claims increases every year due mostly to how easy it is to declare bankruptcy. Decades ago filing for bankruptcy was considered an extreme measure, but so many people have declared bankruptcies in more recent years that it is almost commonplace.

The FBI estimates 10 percent of filings are fraudulent. Those filing fraudulent bankruptcies do so to hide assets (items of value owned by a person) and submit false statements and documents. Creditors (businesses or individuals owed money) lose billions of dollars yearly, because successful bankruptcies allow the individuals or businesses who filed to pay only a portion of their debts. This nonpayment impacts both local and national economies.

Another bankruptcy scheme involves foreclosure scams. Foreclosure is a legal proceeding begun by a lender to take possession of property when the owner fails to make payments on his or her loan. Foreclosure scammers pursue individuals who are about to lose their homes in foreclosure. The scammers promise to work with lenders and arrange a plan for the owners to keep their home. Scammers often tell homeowners to send their mortgage payments to them instead of the lender; the scammers then take the money and disappear. The homeowners generally do not realize they have been scammed until it is too late.


Securities fraud

Securities are stocks and bonds an investor may purchase. Stocks give the investors an ownership share in the company.

Securities Regulation

Between 1929 and 1941 the people of the United States suffered through the Great Depression, the deepest and most prolonged economic crisis in American history. Although many factors contributed to the economic depression, the crash of the stock market in October 1929 marked its beginning. Investors in securities, stocks, and bonds lost everything in the unregulated market.

Following the leadership of President Franklin D. Roosevelt (1882–1945; served 1933–45), Congress passed new legislation known as the New Deal, designed to protect citizens from economic fluctuations. Two of these legislative remedies were the Securities Act of 1933 and the Securities Exchange Act of 1934. Both laws restored investor confidence in the market by providing more structure and government regulation.

The 1933 Securities Act required both businesses who desired to sell their stock and stockbrokers who sold stock to provide full information about stocks to potential investors. The Securities Exchange Act of 1934 prohibited certain activities in stock market trading and set penalties for violations. It also established the Securities and Exchange Commission (SEC) to oversee stock market trading.

These laws were based on two ideas. First, companies offering stock on the market had to tell the public the truth about their businesses and the risks involved in investing in them. Second, stockbrokers were to put the interests of investors above any other consideration and deal with them fairly and honestly.

The two 1930s acts remain the foundation of securities regulation. The SEC continued to be the top regulatory agency at the beginning of the twenty-first century. The SEC oversees all key participants in the securities market including the stock exchanges, stock brokerage firms, the actions of individual stockbrokers, investment advisors, and mutual funds (groups of stocks in which people may invest). They are the overseer to protect investors against deceptive or illegal activities such as security fraud.

Stock ownership entitles investors to a dividend or payment per share of stock if the company earns a profit (money left over after all expenses are paid). Stock increases in value if the company is growing and profitable. Investment in bonds pays the investor a set amount over a period of time like a bank pays interest in a savings account. Bonds do not grant the investor any ownership in the company. Commodities are economic goods being sold and purchased in large quantities. Securities fraud is committed by an individual or firm intending to influence the price of a stock or commodity by providing misleading information to investors.

As more people invest in securities and business practices become more complex, securities fraud involving company officials, investment bankers, and others operating in the industry also increases. Dealing with millions of dollars everyday, some individuals cannot resist fraudulent schemes to pad their own pockets. A stable securities industry is essential for the nation's economic health and financial growth. By the early twenty-first century, approximately 80 percent of the American population owned some kind of stock, bond, or commodity. Only 20 percent of these citizens bought and sold stocks themselves; the majority were invested in retirement plans or company stock option plans.

The FBI is responsible for uncovering securities and commodities fraud schemes. They work in close cooperation with the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD), the Commodities and Futures Trading Commission (CFTC), the North American Securities Administrators Association (NASAA), and state and local agencies.

The usual types of securities fraud are embezzlement and insider trading. Embezzlement is the unlawful use of money belonging to a company or its investors. Types of embezzlement include brokers (those who buy and sell securities) writing forged checks from investor accounts, illegally transferring funds, or purposely misleading investors with falsified documents.

Insider trading involves the sale or buying of stock by people who have knowledge about a company that is not available to the public. For example, executives from a drug manufacturer learn a new drug their company is marketing will not be approved by the FDA (Federal Drug Administration) for general use. They learn this before any public announcement is made and warn a few investors to sell their stock in the drug company before the news breaks and the stock's value falls sharply, leaving the stocks worthless and making them nearly impossible to sell.

Kickbacks, or money payouts, are often paid to persons who have advance knowledge about a product or company and are willing to tell others. If the insider uses the information for his or her own gain, it is insider trading; if the person tells someone else and receives money in return after the information has been verified, it is called a kickback.

A well-known case of insider trading that gained national attention in 2003 and 2004 involved celebrity homemaker Martha Stewart (1941–). Stewart was allegedly told privately that stock in ImClone Systems Inc., a biotechnology company, would plunge in the next few days. Stewart sold her stock to avoid a loss. While Stewart was only prosecuted for lying to the FBI about the incident, her actions were a high-profile example of insider trading.

Another type of securities fraud concerns illegal trading referred to as Micro-Cap. Micro means very small and Cap refers to capital, or the money invested in a company. Micro-Cap stocks are low priced shares of new companies with little or no business track record. Securities fraud rings included organized crime, which often used highly persuasive calls to pressure people into investing money in a Micro-Cap. Any money received is generally hidden in foreign bank accounts, and investors rarely see their money again.

Other twenty-first century securities fraud schemes make use of the Internet. Investors often check the Internet daily for information on stocks. Many fake get-rich-quick stocks are offered over the Internet, tricking unsuspecting or inexperienced investors (see chapter 11 on Cyber Crime).

Another example of securities fraud played out between 2000 and 2002 at Merrill Lynch, one of the nation's top securities firms. In 2000 a number of relatively new Internet companies did their banking with Merrill Lynch, whose securities expert, Henry Blodget, gave these companies a high or "buy" rating (meaning it was a good time to buy these stocks), even when he knew they were in trouble and might fail. Trusting Blodget, many investors continued to follow his advice and buy stock in the companies.


By 2001 several of the companies had failed and investors lost millions. New York attorney general Eliot Spitzer investigated and found emails written between other Merrill Lynch analysts describing Blodget's recommended stocks as "junk," and called them "disasters waiting to happen." Spitzer even found company emails from Blodget himself calling the very stocks he continued to rate high to investors as junk.

Merrill Lynch paid a settlement of $100 million to the State of New York on May 21, 2002. The SEC and other regulators added another $100 million. Henry Blodget was banned from the securities industry and fined $4 million dollars.



Corporate fraud

Investors buy stocks and bonds to make money, therefore they generally invest in companies that appear to be successful. Corporate fraud occurs when a company misleads the public and analysts by manipulating information to make itself look strong and profitable when in reality it is not.

In 2004 one of the largest corporate fraud cases ever involved a Houston, Texas-based energy company, Enron. Enron was formed in 1985 as a merger of Houston Natural Gas and InterNorth. The corporation expanded rapidly both in the United States and internationally through complex deals and contracts. Unknown to all but a few top executives and its accountants (from the accounting firm Arthur Anderson), Enron fell billions of dollars into debt.

Enron's growing debt was purposely hidden from stockholders by fraudulent accounting and continually forming new partnerships with other companies through buying and selling stock. Much of the money used in these stock transactions did not go into Enron but into the pockets of its executives. The fraud was revealed in October 2001 when Enron announced it was worth $1.2 billon less than it had been reporting. Enron fell into bankruptcy and many of its officials were charged on multiple fraud counts, including securities fraud. Investors and employees lost millions; many lost their entire life savings.

Other classic types of corporate white-collar crime include price-fixing and antitrust or restraint-of-trade violations. During the late 1880s leaders of several major industries brought their companies together to prevent competition and ruin smaller rivals. The organizations they formed were called "trusts." To stop these trusts from controlling the markets and the American economy, Congress passed the Sherman Antitrust Act in 1890. This act was the cornerstone of U.S. antitrust and price-fixing law.

Price-fixing involves companies with little competition to set high prices for the products they produce. The Antitrust Division of the FBI prosecutes price-fixing and antitrust cases. One successfully prosecuted high profile case of the late 1990s involved Archer Daniels Midland Company (ADM) and seven other companies. The charges against ADM and the others stemmed from the price-fixing of two chemicals, lysine and citric acid.

By fixing the prices of these chemicals, the companies—which were the largest manufacturers of these valuable products—were able to control sales worldwide. Lysine is used by farmers in feed products for poultry and pigs. Citric acid is a flavor additive and preservative used in many items such as soda drinks, processed foods, and cosmetics. Over a billion dollars in sales worldwide were affected by this price-fixing scheme. Eight corporations and six individual defendants admitted to the price-fixing and were fined about $200 million.



For More Information

Books

Frank, Nancy, and Michael Lynch. Corporate Crime, Corporate Violence. Albany, NY: Harrow and Heston, 1992.

Siegel, Larry J. Criminology: The Core. Belmont, CA: Wadsworth/Thomson Learning, 2002.

Sutherland, Edwin. White-Collar Crime: The Uncut Version. New Haven, CT: Yale University Press, 1983.

Web Sites

American Collectors Association International.http://acainternational.org (accessed on August 20, 2004).

"Counterfeit Division." United States Secret Service.http://www.secretservice.gov/counterfeit.shtml (accessed on August 20, 2004).

"Don't Be a Victim of Loan Fraud." U.S. Department of Housing andUrban Development.http://www.hud.gov/offices/hsg/sfh/buying/loanfraud.cfm (accessed on August 20, 2004).

Federal Bureau of Investigation.http://www.fbi.gov (accessed on August 20, 2004).

International Association of Financial Crimes Investigators.http://www.iafci.org (accessed on August 20, 2004).

International Association of Insurance Fraud Agencies, Inc.http://www.iaifa.org (accessed on August 20, 2004).

National Association of Securities Dealers.http://www.nasd.com (accessed on August 20, 2004).

National Check Fraud Center.http://www.ckfraud.org (accessed on August 20, 2004).

North American Securities Administrators Association.http://www.nasaa.org (accessed on August 20, 2004).

"Telemarketing Fraud: Ditch the Pitch." Federal Trade Commission.http://www.ftc.gov/bcp/conline/edcams/telemarketing (accessed on August 20, 2004).

U.S. Department of Justice.http://www.usdoj.gov (accessed on August 20, 2004).

U.S. Securities and Exchange Commission.http://www.sec.gov (accessed on August 20, 2004).

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