White-collar crimes

Prasad POLWATTE

A white-collar crime is a fraud committed by a dishonest and clever person without disturbing established procedures and control framework of an institution and it is a hot topic in the corporate world. Certain employees or related parties irrespective of their grades misappropriate enormous amounts from companies and many international corporate giants have collapsed due to these white-collar crimes.

An intelligent criminal minded person is capable of identifying the inherent limitations in business processes, ignorance and linearity of processes owners and explores possibilities for white-collar crimes. Generally these culprits deliver greater results than others, blessed and trusted by senior management, and maintain excellent customer relationships. Therefore, they are powerful personalities and emerge as informal leaders in organizations.

Types of crimes

Frauds can be grouped as blue-collar and white-collar crimes. Within the field of criminology, white-collar crime has been defined by Edwin Sutherland as "a crime committed by a person of respectability and high social status in the course of his occupation" (1939). Surtherland was a proponent of Symbolic Interactionism, and believed that criminal behaviour was learned from interpersonal interactions.

White-collar crime, therefore, overlaps with corporate crime because the opportunity for fraud, bribery, insider trading, embezzlement, computer crime, copyright infringement, money laundering, theft, and forgery is more available to white-collar employees.

Crimes such as stealing, burglary, physical assault are identified as blue-collar crimes. The media and general public are more informative on blue-collar crimes but white-collar crimes are not discussed in detail due to many reasons such as; loss of corporate reputation, public confidence, market share and involvement of powerful personalities. Blue-collar crime tends to be more obvious and thus attracts more active police attention and in contrast white-collar crime identification of victim is less obvious and the issue of reporting is complicated by a culture of commercial confidentiality to protect shareholder value. It is estimated that a grate deal of white-collar crime is undetected or, if detected, it is not reported (www.google\\White-collar crime-Wikipedia).

The damage from white-collar crimes do much greater damage to the society compared to blue-collar crimes. Fraud costs the Australian economy at least $3 billion per year and a significant proportion of cases of fraud detected are not reported to the police for investigation (Source: AS 8001-2008).

Common white- collar crimes

Employee embezzlement or occupational fraud, top management providing misrepresentations eg: financial information, individuals tricking investors into investing money into fraudulent investments, organizations overcharging for goods and services or non-shipment of goods even though payment is made, and customers deceiving sellers into giving customers something they should not have.

White-collar criminals are opportunists, who over time learn they can take advantage of their circumstances to accumulate financial gain. They are educated, intelligent, affluent, confident individuals, who are qualified enough to get a job which allows them the unmonitored access to a large sums of money.

Many also use their intelligence to con their victims into believing and trusting their credentials. Many do not start out as criminals, and in many cases never realize. They are classified as criminals.

The barings collapse

In February 1995, Britain's oldest merchant bank, Barings PLC, collapsed with losses estimated at that time to be US$ 1.4 billion. One man became responsible for losing US$ 1.4 b and destroying one of the oldest merchant banks in the world. Nick Leeson, Barings trader, was sentenced to six and half years imprisonment in a Singapore jail on December 1, 1995, convicted on charges of cheating.

Leeson's fast developing knowledge of the securities and banking industry had made him more confident when dealing with his superiors, and his self-assuredness prompted Barings executives to take Leeson out of the back room and put him on the trading floor of London. He was hailed as the accounting whiz capable of resolving difficult transactions and deals. With the powerful status of Barings, Leeson and his colleague took full advantage of his name and reputation, particularly with exchange authorities in London. Further, Leeson was entrusted with responsibilities for both trading, the accounting and settlement activities.

A prudent explanation was not given by the management on this gross flouting of basic rules of separation between the two functions. Further, with his increasing trusted profile, and profit bonus culture of Barings Bank helped Leeson to get away with many cases of dishonesty without been questioned. Leeson was powerful enough to operate an error account and to conceal his suspicious transactions from auditors and these malpractices led to the Barings collapse (CPA, Case Study).

Empirical findings

KPMG's 2008 Fraud Survey is a detail survey dealing with fraud in Australia's and New Zealand's largest organizations across public and private sectors.

Sample selection and general findings

* 420 responses from 2018 surveys of large public and private organizations in Australia and New Zealand

* 45 percent of respondents had suffered fraud in past two years, reported 222,577 incidents

* B Total value of fraud $301 m, average $1.5 m per effected organization

* Gambling most frequent driver

* Internal control most effective in detection

* Employees and managers not auditors detect most frauds

* Fraud 'red flag' ignored in 22 percent of largest frauds

* None of money recovered in 89 percent of cases

* Detected by internal controls, after 11 months

* Financial services sector, seven percent of frauds committed by management, nine percent by non-management, 84 percent by external parties

* Other sectors, 32 percent by management, 25 percent by non-management, 43 percent by external parties

Organizational responses to fraud

* Careful recruitment of staff

* Culture of integrity and loss prevention

* Regular internal auditing of transactions

* Independent audits

* Top level management commitment to fraud prevention

How does the fraudster look like?

* No specific psychological profile

* Non-management employee, with not known history of dishonesty

* Employed for six years, with four years in current position

* 70 percent male, while female make up 30 percent

* Age of the person most likely to commit fraud is 35-44

* Acting alone

* More religious

* Less substance abuse

* Under some perceived pressure (involve financial need).

Factors increase opportunity to commit frauds

* Ability to get around internal controls

* Inability to judge performance

* Failure to detect prior frauds

* Lack of access to information

* Ignorance, apathy, incapacity

* Lack of audit trail

Conditions that contribute to fraud

1 Management not caring about honesty

2 Inadequate pay

3 Low loyalty

4 Crisis management

5 Rigid rules

6 Repression of differences

7 Poor promotion opportunities

8 Lack of recognition

9 Unreasonable budget expectations

10 Short-term focus

11 Reactive, not proactive

12 Hostile work environment

13 Poor training

Accounting anomalies and internal control weaknesses

* Missing documents

* "Stale items" on bank reconciliation

* Excessive voids or credits

* Photocopied documents

* Payee name & address = employees

* Past due account receivables

* Altered documents

* Duplicated payments

* Lack of segregation of duties

* Lack of physical safeguards

* Lack of independent checks and reviews

* Lack of proper authorization

* Overriding of existing controls

Why do employees hesitate to come forward with fraud information?

1 They are not 100 percent sure a fraud is occurring

2 They don't want to wrongly accuse someone

3 They have heard horror stories about what happen to whistle blowers

4 Intimidation by fraudsters

5 Ostracized for whistle blowing

6 No formal process to follow

Conclusion

White-collar crimes are common in any society but due to its high risk nature they are not discussed in open forums. Greed, charismatic leadership at lower grades and lack of control awareness are identified as contributory factors on white-collar crimes.