Countermeasures Against White Collar Crime

Whitney D. Gunter
York College of Pennsylvania
June 2004

The way Americans think of white collar crime reminds me of an ancient Chinese proverb, Akera's Dragon. It tells of a man, Akera, and his search for a dragon. Akera came from a place where any man who slayed a dragon would be considered the mightiest of the warriors. He spent his whole life searching far and wide for the dragon he sought. After 100 years of searching, he collapsed. On his deathbed, he thought back on his life, and realized his mistake. He had wasted his life searching for a fictional beast, for the dragon he sought was the dragon within.

Akera looked for his dragon the same way Americans look for crime. We look for the disgruntled employees, murderous lunatics, and gun-toting bandits. When we plan our security, we focus on locks and barriers. The typical business of medium or large size will hire a small team of security personnel to guard against vandalism, theft, and workplace violence, but, at the same time, gives one person full access to accounting information without direct supervision. That one person could embezzle thousands, millions, or even billions. That one person can cause the business to file for chapter 11, the last thing this company will do. This is the result when trust is given away.

Most people shrug white collar crime (WCC) off as a rare event, fooling themselves into believing that the damage is small. In actuality, the cost is over $44 billion per year for fraud based white collar crime just in the United States. Even more specific, "the total cost of all American bank robberies in the last 100 years is less than the cost of... a single corrupt [Savings and Loan]" (Rosoff, Pontell, & Tillman, 2002, p. 26). However, money isn't the only cost. The ripple effects of human suffering are quite substantial. While it's less likely today, some families affected by WCC in the past have lost so much money that they starve or commit suicide.
In addition to being surprised by the cost of WCC, people are often surprised by the variety of WCC. Sutherland, the man credited with coining the phrase "White Collar Crime," defines WCC as "crimes committed by a person of respectability and high social status in the course of his occupation" (Rosoff et al., 2002, p. 2). Put simply, WCC is a crime committed by someone trusted who makes crime a part of his career. This includes tax fraud, ID theft, and even environmental crimes. Some even say that wars are sometimes considered a type of WCC. Once knowledge of these crimes is obtained, the next step is protecting against them.

Guarding Against the Shadow Crime

Crime Prevention Through Environmental Design, CPTED, is a well known crime prevention strategy. Even though its focus is traditional street crime, its principles can be applied to WCC. CPTAPD, Crime Prevention Through Awareness and Procedural Design, is a more appropriate system for preventing WCC. By creating a heightened level of awareness and procedures designed to combat these losses, a business can be better prepared for WCC.

White Collar Crime occurs when the four components are present: Money, Trust, Greed, and Opportunity (see figure A). By removing access to any of these, the chance of becoming a victim significantly decreases. Money, Opportunity, and Trust can be dealt with differently for each type of WCC. However, Greed, being a part of human nature, can not be removed from a person, but it can be overcome. Edwin Sutherland once said that white collar crime can happen "if, and only if, the weight of favorable definition [to crime] exceeds the weight of the unfavorable definitions" (Albanese, 1995, p. 100).

Figure A: The Components of White Collar Crime

A person will only commit a crime if he or she believes that the benefits outweigh the risks. So, by showing what happens to criminals (increasing awareness), knowing that committing a crime is not worth the risks will become a part of the corporate subculture. Now that we have discussed the causes of WCC, we will take a closer look at a few of the different types of WCC and address countermeasures against each one.

Consumer Fraud

Most businessmen believe that consumer fraud only affects individuals, not a business. That is simply untrue. Any business that buys something is at risk. Here are some examples to illustrate that point:

• A supply manager buys 100,000 pens at an unbelievable $0.04 each. After receiving the pens, the supply manager realizes that the pens are only 1/8 full of ink. He could have bought the pens from a reliable, well-known, supplier for $0.09 each, but instead took the lowest bid without looking at who the bidder is.
• A manager buys a delivery truck. The seller said it was rarely used and the odometer read 30,000. A week later, the truck breaks down. After having it fixed, the manager does some research. It turns out that it had 90,000 miles. Meanwhile, the seller has moved on to another town and another business.
  
• A security director buys 35 uniforms from a catalog he received in the mail. They are $20 each, and only require a $10 deposit each. The uniforms never arrive and the business's phone number has been disconnected.

In each of these examples, it was an individual who was the victim, but he was spending the company's money. These companies gave one person a responsibility to buy. A procedure for buying must be created for all businesses and should include the following:

• Board approval before contracting with a vendor/supplier.
• An investigation period before buying from new suppliers or individuals.
• Most importantly: fraud awareness programs for all employees.

Securities Fraud

A business is more prone to being an offender of securities fraud than a victim. However, with the recent cases of Enron and Worldcom, it has become obvious that companies will face the consequences for their actions. The best way to combat this is to prevent corruption of both management and low level workers. Increasing employee awareness of Enron and other scandals is one way to do this. In many recent cases of corruption, the corruption starts at the top and works its way down. If someone in management fears that a whistleblower will come forward, he or she is less likely to commit the fraud, knowing what will happen. Remember, it is every employee's responsibility to prevent securities fraud; if a business fails, all its employees are out of work.

Embezzlement

Embezzlement is one WCC that is well known among management and, to a lesser extent, security. This may be because the damage is more obvious. Embezzlement is someone taking money, normally by playing with the books. Over time, one person can take millions from a business. This can happen when one person has access to the accounts, but is not supervised, and his or her work is not double-checked. One method for minimizing damage is to hire a forensic accountant, who finds errors and inconsistencies in accounting.

Forensics also can be used in a more positive way to help prevent fraud. A number of accounting firms and law firms offer forensic accounting services in which they run background checks on key employees or red flag odd cash or material flows. However, a forensic accounting generally is not part of a healthy company's routine bookkeeping, but it is an extra tool that can be used to fight white-collar crime. If properly applied, these special techniques can stop irregularities before they grow into crises. (Martin, 1998a, 15)

Running background checks before hiring someone for an important position is another preventative measure. Stephen Nelson, an author for Inc., shows the importance of hiring the right people by pointing out a simple fact: "In my experience, someone who has embezzled once is likely to be a repeat offender" (1988, 5).

Identity Theft

While ID theft affects individuals more than businesses, it should still be an area of concern to asset protection professionals. Typically, someone will claim to be a representative of a reputable business to create trust and then use that trust to commit fraud. After the victim realizes he has been taken, he will blame the business. While, in most cases, he has no evidence to seriously pursue criminal or civil charges, he may harm a small or medium sized business by defaming its image. Often, the perpetrator is a former employee of the business they claim to represent. Businesses must be very careful when placing employees in a position of trust where they have access to personal data. Many consider information the most important asset of the new millenium.

Computer Crimes

Computer crimes are "believed to be the fastest growing type of crime in America" (Rosoff et al., 2002, p. 419). Unlike the other types of WCC, computer crimes are not normally the crime itself, but rather a means of committing, a tool used to reach the criminal's goal. Hacking into a bank's system and illegally transferring money is one example. A small or medium sized business should focus more on protecting information stored within its computers. While espionage by competitors may be an issue for some, protecting customer data (credit cards, bank accounts, etc.) is a more realistic concern. Not only are computer crimes rarely discovered, they are often committed by employees themselves. Friedrichs observes both of these facts in Trusted Criminals:

Most cases of computer crime are discovered by accident because people who use computers to commit crimes are more likely than not to be bright enough and skillful enough to cover their tracks. In one study, a third of those committing computer crimes were managers. (1996, p. 177)

Environmental Crimes

Like security fraud, businesses are normally the offender of Environmental Crimes. The solution in this case would be the same: making examples of what has happened to other offenders. However, sometimes, even a big company, can become the victim:

• Pleezer Inc. buys property for a measly $5,000 per acre. After starting construction, it finds 30 yellow barrels burred underground, all filled with a hazardous substance. The required clean up cost is one million dollars.
• XYZ Corp pays ABC Waste Removers $678,000 to remove 15 barrels of substance GC-161. ABC dumps the barrels in a nearby lake and leaves the country. XYZ may be criminally prosecuted, even though they were only careless, not the actual business that dumped the barrels.

In both of these examples, carelessness left a business responsible for someone else's criminal behavior. Environmental Crimes may be subject to strict liability, the ability to be prosecuted even if no intent to commit the crime is shown. Though, it is noteworthy that strict liability is only imposed in some states, including Pennsylvania. Once again, the key to preventing this is to research a business before striking a deal. Best of all, a business could create a policy requiring just that.

Applying CPTAPD

Crime Prevention Through Awareness and Procedural Design is an idea all businesses should incorporate. They should include articles about white collar crime in a newsletter or make flyers. Next, businesses should create checklists of things to do, such as researching a seller, and distribute them to anyone who has buying power. Having good awareness and well thought out procedures are the best ways to combat white collar crime. By creating such, a business will be ready for the next con man who comes to town, and well aware of what will happen if it become the next Enron. Unlike Akera, this business won't only be prepared for the physical beast, but the one who builds trust and uses it as a weapon as well.

Program Creation Checklist

Awareness

• Make flyers or bulletins using stories about white collar criminals
• Write articles for a newsletter
• Hire a forensic accountant

Procedural Design

• Research sellers before buying
• Be certain that disposal is being performed properly
• Prevent 'blind' trust with other businesses
• Terminate corrupt employees - Prosecute when necessary

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Whitney Gunter is a junior at York College of Pennsylvania. He is a Criminal Justice major with a minor in Asset Protection. He also works as a security officer in the Department of Campus Safety and Security.