White-Collar Criminals: Felons of the Financial Industry

49% of respondent companies around the world disclosed that they’ve been a victim of fraud and economic crime. Considering the myriad of white-collar crimes constantly being reported in the news, the survey results are hardly shocking.
By Tali Bartkunsky
May 10, 2021

How likely are you to believe someone, if they told you that essentially half of the world’s corporations have suffered extensive monetary damage from fraudulent activity?

With all of the preventive measures that exist to circumvent financial scams, this statement constitutes legitimate grounds for suspicion. However, according to PwC’s 2018 Global Economic Crime and Fraud Survey, 49% of respondent companies around the world disclosed that they’ve been a victim of fraud and economic crime. Considering the myriad of white-collar crimes constantly being reported in the news, the survey results are hardly shocking.

Having barely entered 2020, the media has already disclosed numerous financial scandals. Many of these stories have made headlines, including the notorious Ponzi scheme that swindled corporate giant, Berkshire Hathaway. White-collar crime undeniably prevails all around us, and, as such, the need for reliable due diligence practices is demanding our attention. Yet, how can you gain the confidence that your due diligence efforts are truly minimizing your exposure to risk? This analysis explores the hurdles operational due diligence managers face and explores options to overcome them. 

The White-Collar Crime Epidemic

As highlighted in the aforementioned news events, white-collar crime constitutes fraudulent business activities committed by either professionals or corporations, most commonly in the financial sector. 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 analogous ploys. Felonies of this nature are becoming increasingly prevalent, having increased by 13% since 2016, according to the PwC survey. 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.

In light of the white-collar crime epidemic, it is becoming glaringly obvious that operational due diligence has greater value now more than ever. 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 fall prey to a lack of transparency regarding their investment opportunities. Nonetheless, there is still a temptation to avoid negative information and skip over background checks. Yet, when millions, even billions, of dollars are on the line, how can we ignore the significance of ODD? 

The Ostrich Effect: Ignorance is Not Bliss

When investigating a business opportunity, negative information may be revealed in the research process. Specifically during the background check stage of the operational due diligence process, this could mean uncovering a disreputable professional history or a criminal legal background of a potential business partner. While the standard course of action in this case would be to consider the risks of investing with a questionable character, many individuals encounter a psychological phenomenon referred to as “The Ostrich Effect.” Much like an ostrich buries its head in the sand to avoid danger, we often choose to bypass negative information, closing ourselves off completely to conflicting facts that could adversely affect a business deal. This psychological anomaly poses a threat to intellectually honest, informed decision-making. Consumed by the onerous due diligence process, ODD managers might delay running a background check if other aspects of their research, such as on-site visits and interviews, present a promising outcome.

Not only do individuals reject unfavorable feedback, some will go as far as to omit certain procedures so as not to find themselves in a situation where negative information can even present itself. While feigned ignorance is partly attributed to the Ostrich Effect, there are additional reasons as to why some would want to avoid conducting background checks. When the numbers add up to a promising transaction and the onsite visit checks out, executives are eager to close a deal as quickly as possible. Background checks are generally time-consuming, thus delaying negotiations and causing the agreement to be susceptible to reconsideration. 


Taking Your Head out of The Sand: Reducing the Risk of Ostrich Effect

While some may argue that ignorance is bliss, when it comes to avoiding fraud, proactive methods are the preferable approach. Here are a few guidelines that can protect against fraudulent business practices and combat white-collar crime:


Research Background Check Providers

There are plenty of options when it comes to choosing a background check supplier. Though from the outset they all offer similar services, it’s important to analyze the nuanced differences and evaluate how a provider measures up. Determining which due diligence firm is best suited to your needs can be overwhelming, given the multitude of choices. Consider the below questions to identify a background check provider you can rely on:

  • Does the background check company employ skillful research analysts?
  • Does the background check provider leverage technology to filter through large quantities of data and improve accuracy?
  • What is the turnaround time of background checks provided by the screening company?
  • Is the background check company compliant with all necessary regulations, including the Fair Credit Reporting Act? (This is a particularly critical question as if they are not, it is the operational due diligence manager as well as the firm, could be held accountable.)
  • How many counties does the the background check company check per search? (An average of 7-14 are needed to unearth critical information.)
  • Do the reports give context to the meaning behind the data by highlighting red flags?
  • Does the background check provider have a user-friendly online platform and other advanced technological features?
  • When I have questions about a background check, is there cooperative customer-support that will address my concerns in a timely manner?
  • Is the background check easily accessible to share with remote colleagues?

The stakes for selecting the right screening provider are higher than ever, which is why it is important for a company to be diligent when it comes to finding the right due diligence firm.


Prioritize ODD 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. It is crucial for managers to recognize that 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 ODD procedure is fundamental in identifying potential risks. While a person’s past actions cannot exactly 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.


Don’t Let Your Head be Buried by the Sand

In the aftermath of the Madoff scandal, the cost of poor operational due diligence has risen dramatically. Corrupt corporate behavior has evolved from an intermittent scandal to a growing epidemic., And it may be those whom you would expect to trust that are behind it. A PwC survey revealed that, “68% of external actors committing the fraud are ‘frenemies’ of the organisation – agents, vendors, shared service providers and customers.” With white-collar crime near-at-hand, it’s time to dig out our heads from the sand and realize the value in operational due diligence.

The repercussions of the Ostrich Effect and justification for ignoring the screening process is no longer an acceptable excuse. A lack of transparency will ultimately result in inadequate decision-making, and could lead to considerable monetary losses. It’s imperative to prioritize execution of the aforementioned guidelines and to implement proper due diligence practices in order to successfully conquer the battle against white-collar crime.

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