National Paralegal College

White Collar Crime

by Susan Israel

Introduction

White collar crime refers to non-violent, illegal activities that are committed by individuals or business and government organizations for financial or personal gain. According to the FBI’s website, white collar crime is “lying, cheating and stealing.” Many white collar crimes are difficult to prosecute because the perpetrators use very sophisticated technological means to conceal their often complex transactions.

Examples of white collar crime include bribery, Ponzi and pyramid schemes, insider trading, embezzlement, cybercrime (computer and internet fraud), credit card fraud, phone and telemarketing fraud, mail fraud, insurance fraud, healthcare fraud, copyright infringement and trade secret theft, money laundering, identity theft, forgery and even tax evasion.

The Commerce Clause of the United States Constitution authorizes the federal government to regulate and prosecute white collar crime. Many federal agencies, including the FBI, IRS, Secret Service, U.S. Customs and the Securities and Exchange Commission, have a role in the enforcement of federal white collar crime legislation. The FBI estimates that white collar crime costs the United States in excess of $300 billion a year. Furthermore, white collar crime has been increasingly linked to the funding of terrorist activity, and therefore the government, as well as the international community, has incentive to go after white collar criminals.

Cybercrime

Computer-related crime includes hacking, cracking and phishing. Hacking is gaining access to a restricted system through a security flaw. Hackers can invade commercial and government sites and obtain personal information about users. They can also disrupt business and government operations. Cracking refers to the process of invading software to obtain encrypted code or to remove copy protections, or invading the security devices in computer networks. Phishing is the process of obtaining user account and password information through email scams that ask users to link to their account and input their personal information, but the link is to a bogus “look-alike” website where the personal information is gathered and used illicitly.

Cybercrime is used in the commission of the white collar crimes of fraud, money laundering, counterfeiting of currency and identity theft. Identity theft is now believed to be the fastest growing white collar crime in the U.S.

Corporate White Collar Crime

Enron is the most glaring example of corporate fraud and insider trading in recent history. By “cooking the books,” Enron executives greatly overstated the value of the company’s stock, allowing them to sell off their shares for millions of dollars just days and weeks before the company collapsed in bankruptcy. The fallout was enormous as investors lost billions of dollars and Enron employees lost their life savings. As a result of the Enron and other corporate scandals, Congress passed the Sarbanes-Oxley Act of 2002, which calls for tighter standards for all public companies, increased oversight of corporate boards, and more severe penalties for fraudulent activity.

Insider trading is prohibited by the Securities and Exchange Act of 1934. It involves the trading of a company’s public securities by officers, directors and other employees who have access to information about the company that is not known to the public. For example, the top executives of Company A learn that the Board is about to declare a two-for-one stock split and, prior to a public announcement of this information, they purchase thousands of shares of Company A stock. A recent high-profile case involving insider trading occurred with ImClone, a pharmaceutical company. When executives learned that ImClone’s new drug was about to be disapproved by the FDA, they and their families sold their shares, over $13 million worth, prior to the FDA announcement. The CEO was convicted and jailed for insider trading, and Martha Stewart, who was tipped off by a broker friend of the CEO and also sold her shares, was convicted and imprisoned for perjury for lying about it to federal investigators.

Sometimes companies are the victims, rather than the perpetrators, of white collar crime, for example in embezzlement and trade secret theft. Embezzlement is the fraudulent conversion of someone else’s assets to one’s own use for purposes other than what the embezzler was entrusted with. Embezzlement can be accomplished by falsifying records, accounts and ledgers; creating phantom employees; and writing phony checks. Employees have created successful embezzlement schemes and stolen millions of dollars from their employers by hiding transactions for many years before being caught.

Ponzi and Pyramid Schemes

Ponzi and pyramid schemes are fraudulent investment businesses that depend on an ever-increasing pool of new investors to pay the returns of the initial investors. These operations eventually unravel when the supply of new recruits (and new income) dwindles and the promoter cannot keep up promised returns. The largest and most spectacular Ponzi scheme in history was the recent Bernard Madoff scandal, in which his clients, including individual investors, banks, universities and charities, lost in excess of $50 billion. Madoff is now serving a 150-year sentence in federal prison.

Money Laundering

Money laundering refers to the intentional concealment of sources of money, typically money acquired from crime (“dirty” money), and making it appear that it came from legitimate sources (“laundered” or “clean” money). It is estimated that billions of U.S. dollars are laundered every year. Money laundering is achieved by several methods, including: breaking up large amounts of cash into small deposits that escape scrutiny, then purchasing bearer instruments, also in small denominations; investing in cash-intensive businesses; transferring funds to trusts and shell companies; buying a controlling interest in a bank; spending money at a casino or other gambling and cashing in chips; purchasing real estate with dirty money and then selling the property; creating fictional employees and fictional loans.

Money laundering has been long associated with organized crime and illegal drugs. Now, however, there is mounting evidence that laundered money is being used to fund international terrorism. More than thirty nations have signed on to the Financial Action Task Force that has promulgated guidelines for global anti-money laundering standards.

Telemarketing and Mail Fraud

Telemarketing fraud is using the telephone to conduct fraudulent selling, frequently targeting senior citizens. Typical examples include: requesting advance fees to collect a phony lottery prize or government loan; offering to sell worthless securities or timeshares; soliciting for non-existent charities; and charging for services that usually can be obtained for free.

Mail fraud is using the U.S. Postal Service to defraud individuals of money or property. Such schemes include: phony sweepstakes and lottery offers; solicitations for phony charities; employment fraud, which encompasses work-at-home schemes, pyramid schemes and other phony job opportunities; receipt of unsolicited merchandise; credit card offers that you have to pay for; “900” telephone number fraud, in which the victim is directed to call a 900 number for which there is always a charge; other offers to invest in land, securities, oil and gas; and chain letters. The Postal Service advises that “free is free” – you should not pay an advance fee to receive a free prize. And, if it sounds too good to be true, it probably is.

Identity Theft

Identity theft is assuming another person’s identity information, most often to commit financial fraud. By obtaining a victim’s personal information, such as name, address, date of birth and social security number, a thief can obtain loans, credit cards and other goods and services, all in the victim’s name. Fake IDs and fake passports are commonly used by criminals to commit crimes and evade capture.

It has become increasingly difficult in this technological age to protect one’s private information. But it is important to note that it can take years, and a significant amount of money, for a victim of identity theft to clear his name and credit.

Insurance Fraud

Insurance fraud is defined as 1) the commission of any act that is intended to fraudulently obtain a benefit to which the perpetrator is not entitled; and 2) the denial by an insurer of a benefit to which an insured is entitled.

Life insurance fraud involves faking one’s death in order to claim life insurance benefits. Less common, but the subject of many movies, is murdering someone, often a spouse, in order to collect life insurance.

Health care insurance fraud is committed by providers, patients and insurers. Providers may bill for medical services they did not perform, or perform unnecessary surgeries or other treatments. They may inflate the level of services they performed and diagnose and treat conditions outside their area of practice. Claims may even be submitted by individuals who are not physicians. Patients may conceal pre-existing conditions and provide other false or misleading information on enrollment forms. They may enroll ineligible dependents, or fail to disclose when a claim is the result of a work-related injury (and therefore would be a workers’ compensation claim). Insurers may deny valid claims, deny and cancel coverage, and underpay hospitals and physicians for the services they provide.

Automobile insurance fraud often involves rings of criminals who stage collisions, and with the help of a cooperating doctor, submit claims for personal injuries. In the case of an actual accident, the automobile owner may exaggerate the damage to his vehicle by including previously sustained minor damages, or the extent of his personal injuries. Whiplash is a typical injury claimed in auto accidents and is very difficult to disprove.

Property insurance fraud results from overstating the value of property that is lost or damaged in a fire or flood, for example, or intentionally destroying property to receive insurance benefits. The most common property insurance crime is arson.

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National Juris University, the graduate division of National Paralegal College, offers the following programs:

Master of Science in Legal Studies
Master of Science in Compliance Law
Master of Science in Taxation