Today and tomorrow we publish an important essay by a correspondent in law enforcement.
White collar crime is now the business model of Corporate/State America. The Status Quo does not just incentivize pathological behavior, it is itself a pathological system.
Let’s start by identifying the different types of white collar crime (WCC). One is WCC involving individuals against companies (e.g. theft of property from a company) and the government (e.g. Medicare fraud) and the other is WCC of individuals within companies (e.g. MBS debacle) and the government (e.g. taking bribes to favor contractors) against people in our society.
The latter is typically punished and prosecuted less frequently or not as severely than the former for different reasons, one of which is the bias to protect the institution and sweep things under the rug. For instance, a person is allowed to resign, but they’re not prosecuted, so that bad press doesn’t come down on the institution or the supervisors of the criminal actor.
The last type of WCC is person against person (e.g. credit card number thefts) outside of any business or government entity. This last type is usually the domain of organized crime in its typical sense (i.e. the Mob, Mafia, etc.), but organized crime can also be part of the other categories, which is why they are pursued relentlessly by law enforcement agencies. However, some people may not include organized crime in the definition of WCC.
The difference between these types of WCC is who the crimes are committed against. If you commit a crime against the government, a business, especially a big business, or the moneyed classes, you’re screwed (typically). For example, Madoff was prosecuted quickly and punished severely, because he largely ripped off rich people.
However, many of his victims were not victims in the truest sense, because they knew he was running a scam. They were just hoping that some other sucker was going to take the fall and not them. Many of the investors knew Madoff’s returns were impossible in the absence of fraud. Contrast that with the bankers who, via their politically connected banks, ripped off numerous pension funds and homeowners through various scams and none of them have been prosecuted.
White collar crime is prevented first and foremost by adequate controls/procedures/policies within a company that are enforced by management and the board (That’s assuming that they are not the origin of the criminal behavior). Companies do not often prioritize risk controls, because their focus is on making money and providing a service/making a good.
When an organization becomes extremely large, it is very difficult to adequately manage it to prevent problems (I find it funny that big CEOs often say they need their huge payouts because of all of their responsibility, but when something goes wrong, the come up with all sorts of excuses that remove the blame from themselves).
The next thing is implementing a well-thought out regulatory scheme that has an adequate number of competent regulators that are free to do their job with a minimal amount of political interference. The last thing needed is a criminal justice system that prosecutes and punishes white collar criminals as harshly as they do blue collar criminals.
In the case of crimes within the government, there are also needs to be adequate controls. Indeed, WCC in government is probably the most pernicious, as the actors can use the power of the government to cover up their crimes and prevent prosecution. The old adage, “Who guards the guardians?”, comes to mind.
There are a number of cultural and governmental impediments to prosecuting WCCs. One of which is the corrupting influence of money to neuter regulations and to co-opt politically appointed regulators and prosecutors.
Another is perception. Wealth in our country is equated with royalty or a high station in society, so people have a hard time seeing the white collar criminal as the deviant that he is. People have a hard time wanting to punish someone who looks nice, has nice clothes, drives a nice car, lives in a good neighborhood, went to a prestigious school, belongs to exclusive clubs, etc. vs. someone who does not have those things. If you’re poor in this country, that’s almost a crime in and of itself to some people.
Conversely, rich people have all sorts of credibility, whether its deserved or not. Why should I listen to an actor about a topic that’s not related to acting? Sure, he may have some interesting things to say, but he shouldn’t be given automatic credibility on the subject and yet many people do just that. Romney became rich bankrupting companies and selling their assets and yet people look to him to “run our economy”? What politician can ever say that they can run an economy? The Soviets tried to do just that and look what happened to them.
Another reason WCCs may not be prosecuted is that individuals, organizations, governments, and even society at large may be vested in the criminal activity either wittingly or unwittingly. Let’s take an example of a large company that is disposing of hazardous waste illegally. In this case, a powerful executive wants to make a name for himself as a cost cutter that improves the earnings per share of the company and decides that he will have his subordinates illegally burn the hazardous waste in kilns at the factory, rather than having it disposed of properly.
One day, a kiln blows up, because it’s not meant to burn hazardous waste, and the explosion kills a worker. According to the law, there are a number of serious crimes that have been committed, but in this case, nobody, including the company, is prosecuted. Why? Vested interests.
So who are the vested interests?
1) The employees who did the burning or who knew of the burning. If they blew the whistle or refused to do it, they’d be fired or they may have thought that by doing the practice, they’re helping the company to stay in business and thereby helping their fellow workers.
2) The managers and executives who got bonuses, stock options, perks, promotions, or just kept their jobs based upon the cost savings.
3) The board that received their fees and didn’t ask too many questions.
4) The shareholders, including pension funds, who see their stock price and dividends go up.
5) The members of the community, including other businesses, who benefit by having a large company in their area.
6) The politicians who depend upon the company for campaign donations (bribes?), community services, employing their constituents, etc.
7) The customers of the company.
8) The press that depends on the company for advertising revenue.
9) The government itself that depends on the tax revenue that the company generates directly and indirectly (and in the case of banks, the selling of the debt on which the government depends to finance its spending).
All of these interests can bring pressure on the prosecutor(s), who then decides that it is the community interest to not prosecute and to push for a civil resolution. The executive who made the decision may be forced to resign or be fired, but that’s it. Who knows, he may even get a nice severance package for his trouble.
What if the community is national or global in scale, because the corporation we’re discussing is a multi-billion dollar conglomerate? Well, now we have systemic problems, because if this corporation can out-compete others by committing crimes, the others will join in to save themselves (and possibly make a lot of money in the meantime).
Undoubtedly, many of the actors will justify it to themselves by saying that “Everyone is doing it” or “It’s just the culture.” In the absence of a sound regulatory structure and serious criminal consequences, we will get a crime wave. It’s inevitable. The risks have to outweigh the rewards of criminal behavior; it’s not rocket science. (Copyright 2012 C.D.)
Tomorrow, Part 2: ”White collar criminals in our big banks and corporations have turned otherwise legitimate businesses into vehicles to commit numerous crimes.”
Images: Flickr (licence attribution)
About The Author
Charles Hugh Smith writes the Of Two Minds blog (www.oftwominds.com/blog.html) which covers an eclectic range of timely topics: finance, housing, Asia, energy, longterm trends, social issues, health/diet/fitness and sustainability. From its humble beginnings in May 2005, Of Two Minds now attracts some 200,000 visits a month. Charles also contributes to AOL’s Daily Finance site (www.dailyfinance.com) and has written eight books, most recently “Survival+: Structuring Prosperity for Yourself and the Nation” (2009) which is available in a free version on his blog.