White collar crime can seem like a catch-all term for any crime committed by business or government professionals. However, unfortunately there are numerous crimes that can be committed within a business framework, from corporate fraud to money laundering.
Each term refers to a specific aspect of business-related crime. For instance, corporate fraud refers to crimes committed to benefit a corporation. The infamous Theranos was an example of corporate fraud as the illegal actions benefited the corporation. In contrast, white collar crime relates to those crimes that benefit an individual or small group of individuals.
No victimless crimes: The impact of white collar crime
White-collar crime is most common in the financial sector. An astonishing 47% of executives surveyed reported that their company had experienced white collar crime in the past two years. Characterized by a violation of trust, white-collar crimes reveal themselves in a number of deceitful practices such as embezzlement, Ponzi schemes, fraud, money laundering, insider trading, counterfeiting, and other schemes.
It is frequently the case that white collar crimes harm the corporation involved while corporate fraud harms the individual. It has even been suggested that this makes white-collar crimes ‘victimless’ as their victims are usually corporations or businesses as opposed to individuals.
Nevertheless, crimes committed against corporations will indirectly impact individuals, such as shareholders or investors. Even when the victim cannot be seen white collar crime has an impact. Monetary damage suffered by a company translates into a detrimental outcome for those impacted by the company’s financial performance.
There are countless examples of low grade white collar crime. Insurance fraud, false claims of bankruptcy, and tax evasion are all common white collar crimes that fail to reach headlines but have a very real effect in the business world. Insurance fraud is estimated to cost more than $40 billion per year ( this is just for non-health insurance). That costs the average US family between $400-700 per year in increased premiums. In the case of insurance fraud, the ‘victim’ is everyone who pays in insurance premium.
Instant infamy: High profile examples of white collar crime
When detected, cases of white collar crime frequently makes headlines, especially when large sums of money are involved.
One of the most notorious white collar criminals was Ivan Boesky, who earned the nickname ‘Ivan the Terrible.’ Boesky was one of the most successful stock market speculators in the late 1970s and early 1980s, making millions of dollars on high profile arbitrage trades. At the height of his success he had over $3 billion in a limited partnership. This all came crashing down, when it was discovered that he owed his success almost entirely to insider trading. In 1986 he was arrested and eventually paid $100 million in penalties and served three years in prison for illegally manipulating stock prices.
In some ways, Robert Vesco could be called one of the most ‘successful’ white collar criminals. Unlike many others, he ‘got away with it,’ avoiding justice until his death in 2007. Vesco was charged with embezzling $224 million from Geneva-based mutual fund, Investors Overseas Services (ISO). Vesco joined the ISO board in 1970 and proceeded to move their assets to companies and bank accounts that he controlled.
As soon as the SEC filed charges against Vesco, he fled the country, eventually settling in Cuba. Vesco remained in South America for the rest of his life, taking advantage of the lack of extradition treaty that allowed him to remain untouched by the US government.
First National Bank of Chicago
If Robert Vesco is the most successful high-profile white collar criminal, then the employees of the First Nation Bank of Chicago (FNB) might be the least successful. A group of five bank employees stole $69 million from three First National Bank accounts in 1988. They planned to transfer the money to Austrian dummy accounts.
Unfortunately for them, FNB client, Merrill Lynch, immediately noticed a gap of $20 million in their financial records and contacted the FBI. The FNB employees were caught before they could transfer the money and were sentenced to time in prison.
The White-Collar Crime Epidemic
In their 2020 Global Economic Crime and Fraud Survey, PwC collected data from over 5,000 respondents in 99 countries to provide a detailed picture of corporate crime today. The survey found that on average companies experienced at least 6 incidents in the last 24 months. The most common types of corporate crime and fraud are customer fraud, cybercrime, asset misappropriation, and bribery/corruption.
Felonies of this nature are becoming increasingly prevalent, having increased by 13% since 2016, according to an earlier PwC survey.
The COVID pandemic appears to have only increased the problem. The SEC’s Office of Market Intelligences received approximately 16,000 tips, complaints, and referrals in 2020, representing a massive 71% increase over the same period in the previous year.
Who is committing white collar crime?
Despite the numerous accounts of exposed corporate scandals, extortion, and corruption plastered all over the media, white-collar criminals are, evidently, undeterred in pursuing get-rich-quick schemes.
The PwC survey found that the majority of fraud was committed by internal actors, with 37% committed by internal sources alone and a further 20% as collusion between internal and external players. Incidents committed by internal sources alone resulted in nearly $100 million in losses.
37% of fraud cases are committed by internal perpetrators, and of those, 26% are committed by senior management.
Overall losses to corporate crime covered by the survey were shocking… $42 billion in a 2-year period. For some companies the losses were severe, 13% reported fraud that had cost them $50 million or more.
What makes white collar crime possible?
In the simplest of terms, white collar crime continues to be a problem because perpetrators can get away with it.
A lack of high-quality due diligence procedures, both in terms of executive hiring and company investments, creates an environment that allows fraud to continue. When it comes to determining an individual’s business integrity, it’s crucial to evaluate his or her background and identify any red flags. Without sound due diligence practices, executives and firms can fall prey to a lack of transparency regarding their investment opportunities.
6 out of 10 organizations did not have a program in place to address the risk of bribery or corruption in their executive team.
In addition to performing initial due diligence, there is also a need to perform ongoing monitoring of key investments or executives. The PwC survey found that 6 out of 10 organizations did not have a program in place to address the risk of bribery or corruption in their executive team. Half of the respondents either did not perform a fraud risk assessment or only performed an informal assessment.
Without thorough ongoing oversight, companies are leaving themselves open to white collar crime with little recourse when it occurs.
Why do companies ignore the risk of white collar crime?
With such a significant risk posed by white collar crime, why do so many companies continue to be taken advantage of and neglect implementing proper protocols to protect themselves from criminal behavior?
Sometimes the answer is that they place unwarranted trust in individuals and companies with which they are dealing. Performing due diligence is still not always the norm, even at the highest levels. With so many positions filled and deals made through personal networks, with the added risk of confirmation bias, managers are reluctant to spend resources on conducting thorough investigations.
The close relationship between those committing white-collar crimes and those appointed to prevent it has been cited as one of the reasons for limited prosecution of those crimes. Legal scholars have suggested that as frequently the prosecutors and criminals come from the same professional networks, it deters prosecution of the guilty, even when that guilt is apparent.
The importance of thorough due diligence
The PwC survey concludes that to fight fraud, companies must first identify and rank the level of risk. This includes performing ongoing risk assessment and not resorting to the ‘one and done approach.’ Then they advocate using technology to support their monitoring efforts. They suggest that a thorough analysis is needed for all technological solutions to ensure that information is correctly understood. Finally, they advocate having a mobilization strategy in place will allow companies to react to red flags that might come up.
The key to each of these steps is receiving thorough, accurate, and timely ongoing risk intelligence information on both individuals and investments. Background checks are essential to creating a full risk assessment of any new hire or new investment opportunity.
Such background checks must go beyond surface sources to ensure that all possible information is uncovered. A seemingly minor issue, like missing or altered information on a LinkedIn profile, could be a warning sign that requires in-depth investigation.
For many corporations, external background check providers are the most viable way of receiving such information as they have existing systems for reviewing a wide range of information sources.
Harnessing the power of AI to fight white collar crime
Background checks need to go beyond the simple review of information provided by individuals. As the ability to falsify information in the digital age is only increasing. To produce a thorough background check, tens of thousands of data points must be reviewed across a global range of platforms. Thankfully this is now possible with the advent of AI-powered automated background checks.
Intelligo’s background intelligence technology provides an unparalleled level of reviewing data from federal, state and county level civil and criminal court records; corporate registry updates; regulatory filings; news media including global coverage; arrests and warrants, sex offeners registry, and law enforcement watch lists.
With this vast array of data, the Clarity system sorts the data, selecting only relevant matches and then flagging those with confidence scores so you can understand the importance of each data point. Sources are provided for each item so they can be manually reviewed if needed. Clarity provides the depth of information needed to fight white-collar crime in an accessible format that prevents information overload.
Prioritize Due Diligence for Optimal Business Decisions
Conducting operational due diligence serves a greater purpose than merely ticking off the boxes on a checklist before moving forward with a business proposal. Administering the proper screening procedures provides invaluable insight into the prospect of positive or negative collaboration with other businesses and their management teams. Being unaware of the full picture could lead to significant financial losses—an outcome that could have been avoided if all the facts were known from the start.
When it comes to screening individuals, a reliable, accurate, and transparent due diligence procedure is fundamental in identifying potential risks. While a person’s past actions cannot predict their future behavior, a background check certainly provides a glimpse into their professional integrity. Consequently, in order to make optimal business decisions, and avoid the risk of being exposed to white-collar crime, it is essential to prioritize the operational due diligence process.