White-Collar Crime

What Is White-Collar Crime?

White-collar crime is a nonviolent crime committed for financial gain. According to the FBI, a key agency that investigates these offenses, "these crimes are characterized by deceit, concealment, or violation of trust." The motivation for these crimes is "to obtain or avoid losing money, property, or services or to secure a personal or business advantage."

Examples of white-collar crimes include securities fraud, embezzlement, corporate fraud, and money laundering. In addition to the FBI, entities that investigate white-collar crime include the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD), and state authorities.

Understanding White Collar Crime

White-collar crime has been associated with the educated and affluent ever since the term was first coined in 1949 by sociologist Edwin Sutherland, who defined it as "crime committed by a person of respectability and high social status in the course of his occupation." White-collar workers historically have been the "shirt and tie" set, defined by office jobs and management, and not "getting their hands dirty." This class of worker stands in contrast to blue-collar workers, who traditionally wore blue shirts and worked in plants, mills, and factories.

Corporate Fraud

Some definitions of white-collar crime consider only offenses undertaken by an individual to benefit themselves. But the FBI, for one, defines these crimes as including large-scale fraud perpetrated by many throughout a corporate or government institution.

In fact, the agency names corporate crime as among its highest enforcement priorities. That's because it not only brings "significant financial losses to investors," but "has the potential to cause immeasurable damage to the U.S. economy and investor confidence."

Falsification of Financial Information

The majority of corporate fraud cases involve accounting schemes that are conceived to "deceive investors, auditors, and analysts about the true financial condition of a corporation or business entity." Such cases typically involve manipulating financial data, the share price, or other valuation measurements to make the financial performance of the business appear better than it actually is.

For instance, Credit Suisse pleaded guilty in 2014 to helping U.S. citizens avoid paying taxes by hiding income from the Internal Revenue Service. The bank agreed to pay penalties of $2.6 billion. Also in 2014, Bank of America acknowledged it sold billions in mortgage-backed securities (MBS) tied to properties with inflated values. These loans, which did not have proper collateral, were among the types of financial misdeeds that led to the financial crash of 2008. Bank of America agreed to pay $16.65 billion in damages and admit to its wrongdoing.

Self-Dealing

Corporate fraud also encompasses cases in which one or more employees of a company act to enrich themselves at the expense of investors or other parties. Self-dealing is when a fiduciary acts in their own best interest in a transaction rather than in the best interest of their clients. It represents a conflict of interest and an illegal act, and can lead to litigation, penalties, and termination of employment for those who commit it. Self-dealing may take many forms but generally involves an individual benefiting — or attempting to benefit — from a transaction that is being executed on behalf of another party. For example, front-running is when a broker or other market actor enters into a trade because they have foreknowledge of a big non-publicized transaction that will influence the price of the asset, resulting in a likely financial gain for the broker. It also occurs when a broker or analyst buys or sells shares for their account ahead of their firm's buy or sell recommendation to clients.

Most notorious are insider trading cases, in which individuals act upon, or divulge to others, information that isn't yet public and is likely to affect share price and other company valuations once it is known. Insider trading is illegal when it involves buying or selling securities based on material nonpublic information, which gives that person an unfair advantage to profit. It does not matter how the material nonpublic information was received or if the person is employed by the company. For example, suppose someone learns about nonpublic material information from a family member and shares it with a friend. If the friend uses this insider information to profit in the stock market, then all three of the people involved could be prosecuted.

Other trading-related offenses include fraud in connection with mutual hedge funds, including late-day trading and other market-timing schemes.

Detection and Deterrence

With the range of crimes and corporate entities involved so wide, corporate fraud draws in perhaps the widest group or partners for investigations. The FBI says it typically coordinates with the U.S. Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Financial Industry Regulatory Authority, Internal Revenue Service, Department of Labor, Federal Energy Regulatory Commission, and the U.S. Postal Inspection Service, and other regulatory and/or law enforcement agencies.

Money Laundering

Money laundering is the process of taking cash earned from illicit activities, such as drug trafficking, and making the cash appear to be earnings from legal business activity. The money from the illicit activity is considered "dirty" and the process “launders” the money to make it look "clean."

With such cases, of course, the investigation often encompasses not only the laundering itself but the criminal activity from which the laundered money was derived. Criminals who engage in money laundering derive their proceeds in many ways including healthcare fraud, human and narcotics trafficking, public corruption, and terrorism.

Criminals use a dizzying number and variety of methods to launder money. Among the most common, though, are real estate, precious metals, international trade, and virtual currency such as bitcoin.

Money-Laundering Steps

There are three steps in the money-laundering process, according to the FBI: placement, layering, and integration. "Placement represents the initial entry of the criminal’s proceeds into the financial system. Layering is the most complex and often entails the international movement of funds. Layering separates the criminal’s proceeds from their original source and creates a deliberately complex audit trail through a series of financial transactions. And Integration occurs when the criminal’s proceeds are returned to the criminal from what appear to be legitimate sources."

Not all such schemes are necessarily sophisticated. One of the most common laundering schemes, for example, is through a legitimate cash-based business owned by the criminal organization. If the organization owns a restaurant, it might inflate the daily cash receipts to funnel its illegal cash through the restaurant and into the bank. Then they can distribute the funds to the owners out of the restaurant’s bank account.

Detection and Deterrence

The number of steps involved in money laundering, along with the often-global scope of its many financial transactions, makes investigations unusually complex. The FBI says it regularly coordinates on money laundering with federal, state, and local law enforcement agencies, along with a host of international partners. Many companies, especially those involved in finance and banking, have anti-money laundering (AML) rules in place to detect and prevent money laundering.

Securities and Commodities Fraud

Apart from corporate fraud noted above, which primarily involves falsifying corporate information and using inside information to self-deal, a host of other crimes involve duping would-be investors and consumers by misrepresenting the information they use to make decisions.

The perpetrator of the securities fraud can be an individual, such as a stockbroker, or an organization, such as a brokerage firm, corporation, or investment bank. Independent individuals might also commit this type of fraud through schemes such as insider trading. Some famous examples of securities fraud are the Enron, Tyco, Adelphia, and WorldCom scandals.

Investment Fraud

High-yield investment fraud typically involves promises of high rates of return while claiming there is little to no risk. The investments themselves may be in commodities, securities, real estate, and other categories.

Ponzi and pyramid schemes typically draw upon the funds furnished by new investors to pay the returns that were promised to prior investors caught up in the arrangement. Such schemes require the fraudsters to continuously recruit more and more victims to maintain the sham for as long as possible. The schemes typically fail when demands from existing investors outstrip new funds flowing in from new recruits.

Advance fee schemes can follow a more subtle strategy, where the fraudster convinces their targets to advance them small amounts of money that are promised to result in greater returns.

Other Financial Crimes

Other investment scams flagged by the FBI include promissory note fraud, in which generally short-term debt instruments are issued by little-known or nonexistent companies, promising a high rate of return with little or no risk. "Commodities fraud is the illegal sale or purported sale of raw materials or semi-finished goods that are relatively uniform in nature and are sold on an exchange (e.g., gold, pork bellies, orange juice, and coffee)," says the FBI. "Often in these frauds, the perpetrators create artificial account statements that reflect purported investments when, in reality, no such investments have been made." Broker embezzlement schemes involve illicit and unauthorized actions by brokers to steal directly from their clients, usually with a slew of false documents.

More elaborate yet are market manipulations, so-called “pump and dump” schemes that are based on artificially inflating the price of lower-volume stocks on small over-the-counter markets. "The 'pump' involves recruiting unwitting investors through false or deceptive sales practices, public information, or corporate filings." The FBI says that brokers — who are bribed by the conspirators — then "use high-pressure sales tactics to increase the number of investors and, as a result, raise the price of the stock. Once the target price is achieved, the perpetrators “dump” their shares at a huge profit and leave innocent investors to foot the bill."

Detection and Deterrence

Allegations of securities fraud are investigated by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), often in concert with the FBI.

State authorities can also investigate investment scams. In a unique attempt to protect its citizens, for example, the state of Utah established the nation’s first online registry for white-collar criminals in 2016. Photos of individuals who are convicted of a fraud-related felony rated as second-degree or higher are featured on the registry. The state initiated the registry because Ponzi-scheme perpetrators tend to target tight-knit cultural or religious groups, such as the Church of Jesus Christ of Latter-day Saints community that's based in Salt Lake City, Utah.