White-Collar Crime Definition
White-Collar Crime is a non-violent crime wherein the principal intention is to make financial benefits through illegal routes. Such white-collar criminals use their position of power or prestige in the organization to conceal, deceit or violate trust for their personal gains. Such crimes result in financial losses of millions of dollars every year.
In the 1930s, American sociologist and criminologist Edwin Hardin Sutherland coined the term “white-collar crime” to describe those types of crimes in which a perpetrator is a person of respectability – people who possess high social status. The most common motives for these crimes include either gain (or avoid loss) of money or property or to gain an advantage at a personal or business level. Some of the high-profile individuals who have been convicted for white-collar crimes in the last couple of years decades include Bernard Ebbers, Ivan Boesky, Bernie Madoff, and Michael Milken.
- In the US, more than $300 billion is estimated to be lost every year due to white-collar crimes.
- An average white-collar crime inflicts losses of more than $500,000 as compared to $3,000 due to an average armed robbery.
- White-collar crimes constitute more than 3% of the overall federal prosecutions every year.
- Estimates state that 25% of the households end up as victims of white-collar crime at least once in their lifetime.
Examples of White-Collar Crime
#1 – Enron
In the year 2002, surfaced the scandal of EnronScandal Of EnronThe Enron Scandal involves Enron Corporation (Houston based company) duping the regulators by resorting to off-the-books accounting practices and incorporating fake holding. wherein the company employed schemes to hide its losses and fake profits. Soon the company filed for bankruptcy, and its share prices plummeted from its peak of ~$90 per share to just $0.67 per share. Some of the felonious practices used in the case included the use of off-balance-sheet itemsOff-balance-sheet ItemsOff-balance sheet items are those assets that are not directly owned by the business and therefore do not appear in the basic format of the balance sheet. However, they tend to impact the financials of the company indirectly. like special purpose vehiclesSpecial Purpose VehiclesA Special Purpose Vehicle (SPV) is a separate legal entity created by a company for a single, well-defined, and specific lawful purpose. It also serves as the main parent company's bankruptcy-remote and has its own assets and liabilities. (SPVs) for hiding soaring outstanding debt and toxic assets from the eyes of the stakeholders. It is one of the most complex white-collar criminal cases investigated by the FBI.
#2 – WorldCom
In the case of WorldCom, the internal audit team discovered improper accounting of expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital. to the tune of $3.8 billion over a period of five quarters. The restatement of the accounts resulted in wiping off of all the profits that were previously booked for the period from Q1FY2001 to Q1FY2002. The company fired Scott Sullivan (CFO) and forced David Myers (Senior VP & Controller) to tender his resignation. Additionally, more than 17,000 employees of the company had to be laid off. It is considered to be one of the major accounting scandals in the US.
#3 – Bernard Madoff
In the year 2009, came one of the most infamous white-collar criminal of history – Bernard Madoff, ex-Chairman of NASDAQ. He was convicted for running a well-planned Ponzi SchemePonzi SchemeA Ponzi scheme is an act of fraud in which potential investors invest with high expected returns and minimum or no expected risk, whereby returns are generally generated for early investors to attract new investors. The amount invested by new investors is used to pay off earlier investors. that cost the investors around $65 billion. In the disguise of the wealth management scheme, Madoff raised funds from new investors to pay the former investors, and not a single penny of those funds was ever invested. Finally, in June 2009, Madoff was found guilty and was sentenced to 150 years in prison, sending a strong signal to any future perpetrator.
Types of White-Collar Crime
- Corporate Fraud: In most of the corporate frauds, the culprits resort to insider tradingInsider TradingInsider trading is defined as the act of taking key trading decisions related to a company’s listed stock using critical non-public information. The US Securities and Exchange Commission (SEC) penalizes offenders of illegal insider trading as it causes material loss to the investors. It also shakes their faith in the stock market. , forgery of financial information, or design schemes to hide other fraudulent activities from the eyes of the regulators, such as the Securities and Exchange Commission (SEC).
- Embezzlement: EmbezzlementEmbezzlementEmbezzlement refers to the act of secretly taking, withholding, or misappropriating money or other asset that is kept, maintained, or placed under an individual's responsibility by the company for which he or she works. refers to the situation when a person misuses the trust placed in him by his employer or another person to misappropriate funds. Typically, the offender finds ways to siphon off the company funds into their own bank account.
- Ponzi Scheme: It is a type of investment scam wherein the investors are promised high returns for almost no risk at all. Basically, the fraudster uses money from new investors to pay-off the former investors, and the chain continues until new investments dry out.
- Bankruptcy Fraud: Bankruptcy is a type of relief offered to businesses when they end up with an overwhelming amount of debt due to distressed financial conditions. In such cases, the creditors and lenders are left high and dry as they receive only a certain portion of their actual receivables. So, some people try to exploit the relief package by fraudulently filing for bankruptcy by deliberately hiding their assets.
How to Identify?
- Identify the Signs: Nearly every fraudster leaves behind some trail or warning signals, and hence we must be able to identify these red flags. For instance, altered or missing accounting documentation is an example of such a red flag.
- Empower the Staff: Usually, the staff-level employees are considered to be the first line of defense and are the ones who work side-by-side with the offenders. They must be empowered and encouraged with various policies, such as whistleblower policyWhistleblower PolicyWhistleblower policy is a set of rules and guidelines that all corporate stakeholders, employees, contractors, shareholders, vendors, or anybody else must follow if they notice something illegal or unethical happening within the organization, whether intentionally or unintentionally..
This has been a guide to What is White-Collar Crime & its Definition. Here we discuss its examples, types, and how to identify such crimes. You can learn more about from the following articles –