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What Is White-Collar Crime: Types and Examples

Posted on by Steven in CrimeJuly 04, 2024
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Many crimes don't involve sordid alleyways, getaway cars, or lethal weapons. In fact, white-collar criminals rarely see their victim's faces, but the damage is just as severe.

These schemes are amorphous, making it hard to precisely define a white-collar crime. The most inclusive definition is that they're non-violent offenses fueled by financial greed. People associate a unique wickedness with white-collar crimes as they're well-planned rather than performed out of raw emotion or desperation.

Understanding and recognizing the numerous types of white-collar crime will help you combat these activities professionally and financially.

What is White-Collar Crime In 1939, Edwin Sutherland coined "white-collar crime" to differentiate the magnitude and goals of crimes performed by influential and powerful people. He characterized these crimes as inherently manipulative and deceitful rather than relying on a physical threat to induce duress.

Nowadays, white-collar crimes aren't restricted to those in the upper social niche. The ties between technology and finances allow outsiders to an organization to attempt scams like identity theft, insider trading, andcorporate fraud.

Main Types of White-Collar Crime

White-collar crimes cover a vast catalog of illegal activity, each with unique strategies. The most common and well-known types include the following:

Health Care Fraud

Health care fraudinvolves fraudulent activities that intentionally deceive the health care system to receive unlawful benefits or payments. This type of fraud is not victimless; it affects individuals and businesses by causing significant financial losses, raised health insurance premiums, and unnecessary medical procedures.

health care fraud

Embezzlement

Embezzlement is the intentional mishandling of funds or assets entrusted to an individual. This crime usually occurs within a professional organization but has personal applications like hiding assets in a will.

As one of the broader examples of white-collar crime, some people are confused about exactly what is embezzlement. The most famous embezzlement case was Bernie Madoff'sPonzi scheme, in which Madoff embezzled $65 billion in investor funds.

Managers and financial officers are the most likely offenders, but anyone responsible for transactions or budgets has the option to embezzle. Actions like pocketing leftover money from a party budget or personally cashing customer checks can result in embezzlement charges.

Identity Theft

Identity theft is the fraudulent acquisition of someone's personal and financial information. Criminals target details likesocial security numbers, bank account information, online account credentials, and more.

This information is leveraged to access additional, more sensitive information and completely take over an identity. In addition to draining someone's credit,identity theftcan also give a criminal access to confidential business assets or the power to damage a competitor's image.

Phishing, hacking, anddata breachesare the most common methods leading to identity theft. Higher profile schemes use more sophisticated techniques like spear phishing to research and better manipulate their target.

Insider Trading

Few people believe the stock market is inherently fair, but guidelines are in place to prevent malicious manipulation. Insider trading refers to the buying or selling of stocks based on non-public information.

This practice prevents executives or employees with a more accurate read on a company's standing from having an unfair advantage over regular investors.

One of the most famous insider trading cases came from Martha Stewart in 2001. The TV personality, along with key executives, sold off massive amounts of ImClone shares before the Food and Drug Association denied approval for a new cancer drug.

Money Laundering

Money laundering involves hiding the source of illegal funds by transferring them through foreign banks or hiding them in the accounts of a front business. This crime has three stages: placement, layering, and integration.

These steps disconnect the funds from their original source and create evidence of legitimate channels from which the money was gained.

A recent money laundering case that made global headlines was in Trump's 2016 presidential campaign. Paul Manafort, the campaign chairman, was charged with laundering $30 million coming from Russian sources.

Corporate Fraud

Corporate fraud refers to manipulating an organization's financial statements to deceive investors or gain an unfair advantage. There are countless ways for companies to engage in corporate fraud, such as embezzlement and insider trading, but the signs are hard to catch.

Criminals mask their actions behind legitimate business practices or go through convoluted processes that dilute the illegal action. Some examples include hiding declining sales or underreporting business expenses.

Bribery and Corruption

Most people are familiar with bribery and corruption from an early age. Parents frequently bribe children with candy or screen time in exchange for a moment of peace.

In professional settings, corruption undermines general ethical standards and unfairly benefits a group.Bribery and Corruption crimeinvolves obtaining a more favorable position by offering value to someone in an influential position.

In 2008, Siemens AG paid millions to the president of Argentina to finalize a billion-dollar contract. This broke America's Foreign Corrupt Practices Act and ultimately led to $1.6 billion in fines to the US and Germany.

The Impact of White-Collar Crime

White-collar crime has severe consequences from the top to bottom of society. Governments and businesses can irreparably damage their international reputation, while individuals can have their life savings robbed in the blink of an eye. High-profile cases like the Enron scandal and the Bernie Madoff Ponzi scheme have significantly impacted public trust in the financial system.

Economic Impact on Businesses and Individuals

White-collar crimes are often the result of individual employee actions. The offender may be worried about losing their position or want to profit from the organization's reputation or condition.

However, white-collar crimes are allowed due to weaknesses in an organization's security protocols or management structure. Involved businesses typically face fines, loss of business, and mass forced resignations.

Individual victims of white-collar crimes face substantial financial risk. They could make poor investments based on a company's lies or have their credit destroyed due to identity theft.

Social and Psychological Effects on Victims

As expected, losing your savings or going into debt applies massive social and psychological stress. Victims are set back years, potentially decades, on their life goals and face the stigma of falling for a corporate sham.

The long-term effects on victims of financial fraudinclude reduced trust, anxiety, depression, and a sense of helplessness.

Broader Impact on the Economy and Society

Standalone instances of white-collar crime can have lasting consequences on the economy. Trust is challenging to earn and even more challenging to earn back.

Organizations that defraud investors and consumers lower people's willingness to engage with the market. Additionally, the victims may not have the financial leeway to provide the same purchasing power.

The 2008 housing collapse was the result of countless white-collar crimes that put hundreds of thousands of Americans on the street. It also was the catalyst for a worldwide economic collapse that continues to fuel distrust toward banks.

Examples of White-Collar Crime

Knowing the history of white-collar crime cases provides context on how it shaped the rise and fall of business giants. Severe events may even point to oncoming recessions or other downturns.

Enron Scandal

In 1992, theSECapproved a new accounting method called mark-to-market. This method tracked the fair value of accounts, which means the rough price at which an asset is acceptable to buyers and sellers.

However, this value is vague and susceptible to manipulation. During the dot-com bubble, Enron overcalculated the future growth of several markets, inflating the fair value of investments through mark-to-market accounting.

This practice hid Enron's devastating losses from future projects, enabling the CEO to misreport to investors and creditors. In a little over a decade, Enron's share price had fallen from $90.75 to $0.26.

Bernie Madoff's Ponzi Scheme

Bernie Madoff's Ponzi scheme is one of the most famous scandals in financial history. Ponzi schemes con investors by falsifying profits and using the incoming investments to pay anyone wanting to cash out.

Madoff's scheme reached thousands of people, claiming to use a legitimate split-strike conversion and returning up to 20 percent per year. These numbers were stellar but not enough to earn outright suspicion.

The public portfolio continued to attract new investors, funding itself like a self-propelled machine. However, the scheme fell apart due to a massive number of redemptions that the model couldn't support. Madoff was sentenced to 150 years imprisonment and lost nearly all of his assets.

This event also led to a significant loss of trust in the SEC to manage financial markets.

Wells Fargo Account Scandal

In 2016, Wells Fargo was caught encouraging employees to use aggressive and unethical sales strategies. The bank set high sales targets for branch managers and put excessive pressure on employees to engage in cross-selling to meet quotas.

Bank employees opened roughly 2 million unauthorized accounts designed to collect customer fees. The reported damages were relatively small, with only 115,000 accounts reporting fees of $25 on average.

The biggest issue was that Wells Fargo maintained various protocols to prevent abusive sales practices. These defenses ranged from integrity violations to full-fledged whistleblower hotlines. The ineffectiveness of these controls increased consumer wariness toward big organizations.

WorldCom Accounting Scandal

A perfect example of corporate fraud, WorldCom was the second-largest long-distance telephone company in the US. The company engaged in company-wide accounting fraud by reporting its rising expenses as investments.

Cynthia Cooper, a WorldCom VP, found nearly $4 billion in misreported expenses during an internal audit in 2002. After the public apology, WorldCom's stock price immediately plummeted, leading to billions in losses.

The financial stress trickled down to employee pensions and job retention. The CEO, Bernard Ebbers, faced 25 years in prison but was released early due to deteriorating health.

Prevention and Detection of White-Collar Crime

Preventing white-collar crimes requires a joint approach through control protocols, responsible management, and employee integrity.

The first step is to separate the employees that report and review your financial records. Leaving audits in the hands of anyone related to balance sheets or reporting is like a free pass to falsify and embezzle funds.

Modern accounting and security programs are equipped with AI and machine learning. These programs can detect anomalies in the accounts as long as one person is not handling all the reports.

Lastly, it's crucial to create an ethical culture within the organization. Encouraging employees to challenge unethical practices creates an environment where problems are reported and dealt with sooner. For this goal, the presence of anonymous communication channels is essential.

detection of white collar crime

There are many levels of white-collar crimes with matching penalties. In most cases, the legal consequences for these offenses are fines, restitution, or imprisonment.

  • Fines:Monetary penalties are typically based on the level of deception and damages. Fines are not paid back to the victims but are a consequence of breaking the law.
  • Restitution:Money aimed at helping those victimized by the crime. The amount could equal the losses but depends on the organization's situation. Wells Fargo's victims lost an average of $25, which was paid back after everything came to light.
  • Imprisonment:This punishment is often reserved for those most responsible for the crime. Bernie Madoff's 150-year sentence is the longest punishment for corporate fraud.

The effectiveness of these deterrents is an ongoing debate that mainly boils down to risk versus reward. Desperate individuals who believe they won't get caught are more likely to commit white-collar crimes.

Some inconsistencies lead people to believe the wealthy are sentenced more lightly. This leads to white-collar crimes, a wealth-biased crime type, to have less severe consequences.

White-collar crimes cover a broad range of non-violent offenses. They're committed by executives, individual employees, or anyone with a financial motivator. Understanding the types, history, and penalties associated with white-collar crime is essential to combat these illegal activities.

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