19 July 2012

Organized Financial Crime Is Now the New Normal

How White Collar Crime Became the "Business Model" of Corporate/State America

Of Two Minds | By C.D. | 17.07.2012 | NEDERLANDS

Today and tomorrow we publish an important essay by C.D., 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. CHS

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."

Organized Financial Crime Is Now the New Normal

Of Two Minds | By C.D. | 18.07.2012 | NEDERLANDS

Today we publish the second half of an important essay by C.D., a correspondent in law enforcement.

It's up to us to refuse to participate in a criminal financial system: we should not be doing business with businesses that are repeat offenders.

We could expand this example of vested interests suppressing prosecution of white collar crime to the financial system, more particularly, the stock and bond markets. The majority of the adults in our country are invested either directly or indirectly in the stock market via trading accounts, pension funds, 401Ks, etc. and have a vested interest in making sure that it rises higher and higher.

How many people would be willing to get rid of all of the drug money in the stock market, if they knew their 401K would decrease by 10%? How many people would get rid of all of the various types of fraud in our system, if they knew their pension fund would lose half or more of its value or the interest rate on their Aadjustable rate mortgage (ARM) skyrocketed? How many politicians are going to refuse bailouts of the banksters or call for their prosecution if the banksters can take down the stock market?

When TARP was being voted on the first time, the overwhelming majority of the population was against it. The day after the first vote, the market tanked. Guess what, the next day it was about 50/50 in who wanted TARP to pass vs. those that didn't.

White collar criminals in our big banks and corporations have turned otherwise legitimate businesses into vehicles to commit numerous crimes. They use the corporation or other business entity as both a sword and a shield. The entity is used to help commit the crime and then used to protect them personally from any criminal or civil liability. In my experience, more often than not, a prosecutor will forego charges against an individual and just charge the business entity, because it's a stronger case.

If CEOs started going to jail for long stints, that would be very helpful in cleaning up things in a hurry. If the only downside to a CEOs behavior is that he may have to leave his job and suffer some temporary embarrassment, that's not much deterrent to him engaging in activity where he can make large sums of money. While fines can have some deterrent effect on a company's behavior, their effect is often muted by the fact that the fines are less than the profit from the activity, the cost of the fines can be passed on to customers, and in the case of the banks, the fines are subsidized by the government itself or the Federal Reserve.

It's important to bring individuals to account for their behavior. Company policies and activities were directed by someone or group of people; they don't just happen in a vacuum.

The criminal justice system can't effectively handle a large case load without a tremendous amount of manpower, so it's important to have a good regulatory system in place that can prevent many problems. It's also important to realize that prosecuting someone criminally requires a lot of resources and a significant amount of proof (which can be difficult to obtain) and in the absence of a good regulatory scheme, it can be extremely difficult to stop criminal behavior.

White collar criminals can use any number of excuses to cover up their criminal acts (e.g. miscommunication, misfeasance/malfeasance by subordinates/consultants, ignorance/misinterpretation of the law, bad legal advice, administrative errors, stress, etc.). With many crimes, a prosecutor needs to be able to prove the WCC knew what he was doing or intended to do something, as opposed to negligence or recklessness. Again, that can be difficult.

One often overlooked aspect of WCC is the use of lawyers by White collar criminals to commit their crimes. For instance, WCCs may ask lawyers ahead of time about how to change the system, so that their illegal activities become legal or they'll ask the lawyers how to avoid getting prosecuted for their anticipated or current illegal activities. Then the WCCs can hire connected attorneys who may try to bring political pressure to nix a case, if they can't win the case using the law or the facts. Or attorneys can try to win the case in the court of public opinion, which may help nix a case or at least mitigate the punishment.

The widespread amount of fraud and all of the resulting tangential crimes could not have been committed without the assistance, wittingly or unwittingly, of various attorneys. Numerous attorneys have helped to foreclose on homeowners when they KNEW the foreclosure paperwork was not right in one way or another. Every one of them should be sanctioned up to and including the revocation of their law licenses.

It's interesting to see the different types of language used in describing White collar crime vs. blue collar crime. The press and the advocates for the WCC use various phrases like "too big to fail", "it will damage the market or the economy", "we can't regulate ethical behavior," "we need a truth commission, rather than a criminal investigation," etc. With the first argument the management of a company is perceived as being inextricably linked to the company and that the company is indispensable to the country (e.g. The big Wall Street banks). This is a case where the actors are confused with the play and many people fall for it. The other arguments deal with downplaying the crimes of the higher classes to turn them into lapses in ethics or judgment.

The damage that these criminals inflict on society is typically diffuse over a great many people or area and is often indirect. Other types of crime (e.g. assault, rape, murder, arson) are very direct and discrete. If you steal a little from a great number of people, especially using a company to do it, the likelihood of you being caught is small and if you are caught, it's difficult to prove intent, and if that can be proved, then your punishment is typically relatively light, as opposed to someone who robs a bank.

Look at the number of corporations that have been caught repeatedly and they only pay a small fine, promise not to do it again, and admit to nothing. If you pollute the air illegally, it will diffuse over a wide area and most likely will lead to chronic, as opposed to acute, effects on people. The same can be said of the impacts on fish and wildlife. However, there are times when there are serious acute effects on people and our natural resources.

Ultimately, we should not be doing business with businesses that are repeat offenders; it's kind of like Stockholm syndrome. We keep on allowing ourselves to be abused and even protect our abuser. Unless and until the business changes their ways and assists in the prosecution of White collar criminals, we're going to keep on having problems in how our society functions.

Why our local governments continue to do business with the big Wall Street banks is beyond me. In many cases, it appears that the management decided to incorporate fraud into their business models. No reasonable person would knowingly do business with the Mob, but we continue to do business with these banks which have been run just like organized crime.

We can either live by the rule of law or the law of the jungle. I prefer the former. (Copyright 2012 C.D.)

Thank you. C.D., for sharing the perspective of someone working within law enforcement. Once we accept organized, systemic financial fraud and crime as somehow serving our interests, we have made it "the New Normal." Our complicity will not go unpunished. CHS

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