Corruption, white collar and blue collar crimes

Prasad Polwatte

Corruption, white collar crime and blue collar crime are popular coverage for the media because people prefer to listen/watch/read the dark side of society. Corruption accusations are common in developing countries where public sector plays a prominent role in the economic development process. In contrast white collar crimes are more evident in developed countries, such as US and UK, where the private sector is dominant.

Stringent measures required to fight corruption

Serious allegations of these crimes were raised during many regimes without any remedial measures, but civil society, media, judiciary and regulators have forgotten the past and instead discussed recent development and finally they ended up as costs to society. Corruption and white collar crime are result of weak governance, lethargic administration, ineffective professionalism, public ignorance and biased media.

Nicolaus Copernicus (1529) - I have observed that in countries with good money the art and business flourish and there is wealth everywhere whilst laziness, idleness and indifference prevail in countries where bad money is in circulation.

Illegal payment

Corruption occurs when an official transfers a benefit to an individual who may or may not be entitled to the benefit, in exchange for an illegal payment (the bribe). By taking the bribe, the official breaks a legally binding promise given to his principal to allocate the benefit to those entitled to it. Corruption is neither a property of a social system or an institution, nor a trait of an individual character, but rather an illegal exchange (www.answer.com).

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 often 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 see themselves as such.

Shareholder value

Crimes such as stealing, burglary, physical assault are identified as blue-collar crimes and they tend 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 great 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 is much greater to the society compared to blue-collar crimes. Frauds have cost the Australian economy at least $ 3 billion per year and a significant proportion of cases of fraud detected were not reported to the Police for investigation (Source: AS 8001-2008).

At least two parties are needed to execute a corruption/malpractice activity; i.e. a receiver and a giver. As an example, one person should offer a bribe and another party has to accept it. Without a giver receiver will not survive. It is apparent that in bribery the private sector is the giver and the public sector is receiver. Empirical studies found a positive relationship between the extent of bribery and the level of ‘Red Tapes’ tiers of government; the amount of time spent by managers with public officials, the cost of capital and investment and the degree of regularity discretion on the part of officials (www.answer.com).

Transaction process

Any transaction must accomplish following steps, i.e.; authorization, execution and recording. These steps have to be performed by different officers and the support of the entire group is required for corruption. These officers should possess the required experience, training and competencies to perform their duties and they must have the capability of understanding the irregularities in unusual transactions. However, some public sector employees overemphasize on procedures and hinder customer service to gain secret profits out of it. They insist on too many approvals and unwanted documentary evidence and sometimes a customer may have to visit several times to get the required service or job done. But the same employee with a bribe could be motivated to be a very flexible and customer friendly person.

Silent observers

Thus, a honest a competent officer in this transaction loop should be able to understand and resist malpractices. The question is; is it happening? Most of us behave as silent observers and allow others in pursuing corrupt activities and when things go wrong point finger at government as the sole party responsible for the corruption.

John Perkins described himself as an economic hit man, a highly paid professional who cheated countries around the globe to the tune of trillions of dollars (Confessions of an Economic Hit Man, 2005). The confessions of John Perkins reveals that he was able to grant enormous sums of unproductive financing to developing countries via bribing rulers and bureaucrats. The question to be raised is; who is guilty; John Perkins/US financial institutions/politicians? If the bureaucracy was honest, energetic and assertive these destruction would not have happened.

A smart fraudster can commit a fraud individually without the knowledge of others. But others’ assistance/ignorance is required to complete approval, execution and recording processes.

In 1995, Britain’s oldest merchant bank, Barings PLC, collapsed with an estimated loss of US$ 1.3 billion, due to loss making deals (futures contracts) of one employee, Nick Leeson (CPA 107, Corporate Governance and Accountability, 2004). From futures contracts Nick Leeson made enormous profits to the company and Baring’s bonus payment dominated culture made him a very powerful person and he was able to deviate from controls such as; segregation of duties, getting exempted from audit verifications. Further, the inexperienced staff did not understand the intricacies of futures contracts and some have helped him to camouflage losses. Similar facts were exposed locally in the Ceylon Petroleum Corporation hedging deal.

In 2001, Enron Corporation, the world’s largest energy trading and distribution company announced an US$ 1 billion loss. Substantial components of the company’s last four years profits had been overstated and insiders used this information and sold stocks. Privileged insiders walked away with US$ millions worth of stock related profits whilst ordinary employees lost their life savings. Arthur Andersen Co, a member of “Big Five” audited Enron had given a clean report on their creative accounts (CPA 107, Corporate Governance and Accountability, 2004). Enron was the most profitable client of Arthur Anderson and knowingly gave a clean audit opinion to be retained by its client. Auditors were held liable and became bankrupt due to this liability.

2007 Sub-Prime mortgage crisis: Financial institutions offered attractive, but unrealistic housing loans and also issued asset-backed securities to the stock market. They made very high profits and rating companies offered high credit rankings. CEOs of these companies were the highest paid in US and they enjoyed luxurious lifestyles using the company’s money. The housing bubble busted, housing loans were defaulted and people became homeless.

Wall Street institutions couldn’t payoff mortgage backed securities which lead to the major financial sector collapse in the US. Corporate greed was identified as a reason for this crisis. Theoretically auditors are appointed by shareholders at the Annual General Meeting. But in reality auditor and the audit fee is decided by the corporate management and therefore auditor acts as a subservient of the corporate management. Such acts were revealed in the workings of deposit mobilization of organizations during their collapse in 2009 leading to a crisis requiring CBSL intervention in the greater interest.

Corruption and White-collar crimes are common in any society, but greater coverage is given on corruption in the public sector to gain political mileage, in contrast to white collar crimes which are given low prominence by media due to its high risk nature and the secrecy maintained by the private sector. Lack of good governance, control ownership culture and lethargic approach of technocrats and bureaucrats continued to be the main contributory factors on corruption.

The corporate greed, charismatic leadership at lower ranks and file, and lack of control awareness are identified as contributory factors to white-collar crimes. Thus, clear demarcations of corporate liability and within such the directors’ liability have become an important and debatable issue.