White Collar Crime hard to Deter? Perhaps we’re trying the wrong approach says Business Ethics Speaker Chuck Gallagher

February 23, 2010

How do companies deter White Collar Crime?

With media reports filled with stories of “white collar crime” such as the developing Koss embezzlement story and the on-going reports related to Allen Stanford and recently sentenced Bernie Madoff, it’s no wonder that organizations are seeking to find deterrents to this seemingly growing phenomenon.

As I prepare to address a group in just hours, I came across this article in the Charleston Regional Business Journal and it struck me – “We’re going about this all wrong!”  But, before I suggest what’s right let’s look at excerpts from the article featured below.  The whole article is here:

Law school panelists: White collar crime hard to deter

By Andy Owens
aowens@scbiznews.com
Published Feb. 22, 2010

Crime pays, at least if you’re a midlevel executive wearing a white collar.

Panelists at a symposium on crime and punishment said that fraudsters find the risk of being caught typically worth the potential reward for all but the most top-level executives.

Using Enron and WorldCom, along with more recent financial fraud, as examples, the panelists — a federal prosecutor, a CPA and a former Securities and Exchange Commission official — said deterring white collar crime is difficult, partly because criminals are typically caught after years of high living and typically only the top executives receive the harshest penalties.

COMMENT #1: The first problem I see is that none of the panelists have any background as a criminal.  Each represent a segment of society that intellectually is connected with and perhaps understands “white collar crime”, but none are “white collar criminals.”  Therefore, they see things from their perspective but have no practical experience in showing others how to deter crime.  See the list below and then ask yourself, how could any of these folks really identify with the commission of a crime and therefore how to prevent it?

The symposium, held by the Charleston Law Review and the Riley Institute at Furman University, took place Thursday and Friday in downtown Charleston. It included a keynote address by the founder and executive director of the Equal Justice Initiative based in Montgomery, Ala., as well as a series of panel discussions by scholars, judges, lawmakers, lawyers and public advocates.

‘Like the Whac-A-Mole game’

For example, in 2000, the FBI reported that the number of suspicious mortgage fraud cases was 3,515. By 2008, that number had risen to 63,713. Even eliminating false alarms, the numbers are growing at an enormous rate, said Daniel V. Dooley, CPA and a former senior partner with PricewaterhouseCoopers.

“This trend is staggering,” Dooley said. “This is like the Whac-A-Mole game.”

COMMENT #2: Why is this trend up?   To someone who has been involved in white collar crime the answer is obvious.  From 2000 to 2008 we experienced unprecedented economic growth.  Everything was financially rosy.  We acquired more debt.  We lived more extravagant lifestyles.  We created a larger life illusion.  Therefore, two things were present to fuel the white collar crime growth: (1) more money to steal; and (2) greater need (the first component that exists for the creation of a white collar crime).  The crimes have always been there, its the economic decline that has caused them to come to the surface.  Think of white collar criminal as fish (bottom feeders if you will).  When the water is high you don’t see them.  They are there all right, but out of sight.  But in a drought when the water level recedes they come to the surface.  In an economic recession, when the money recedes you see white collar crime come to the light.  The principle is easy.

In a recent paper, Dooley and Mark Radke, a former SEC official and partner with Dewey & LeBoeuf, wrote that this can be a big challenge to the argument that lengthy prison sentences deter fraud.

“Most financial criminals don’t think about it, and they don’t think they’ll get caught,” Dooley said.

The 150 years in jail that Ponzi schemer Bernie Madoff received will likely deter only him from committing similar fraud, Dooley said, and even those who consider they might get caught know that they might have a decade or more to live off ill-gotten gains before anyone notices.

COMMENT #3: Will the long prison sentence deter the crime.  Well with Madoff getting 150 years and a fellow from Maryland sentenced in Texas to 99 years for a $10 million crime – folks are taking notice.  But, Dooley is right.  Most white collar criminals don’t think they will get caught.  Why?  First, once you have satisfied your NEED…you begin to RATIONALIZE your behavior.  That’s the tricky part cause if you can convince yourself that you’re not committing a crime – you begin to believe your own ILLUSION (your own lie).  So…if you can help people understand the impact that PERSONAL RATIONALIZATION has in the commission of the crime, you likely can begin to prevent the behavior that leads to such an ILLUSION.

Radke thinks the SEC should act less like a prosecuting agency and more like a gatekeeper that could shut down rip-off artists even without a case that could go before a court. He said a lot of the damage that’s being done could be stemmed if the SEC would use its regulatory power to freeze assets and bar fraudulent activity from occurring.

“You don’t have to build a case beyond a reasonable doubt” to act, Radke said.

Assistant U.S. Attorney Rhett DeHart agreed that a more regulatory approach would be helpful in stopping financial criminals, but he said it’s impossible to know if large prison sentences deter the trend of financial fraud because you can’t measure the incidence of someone not committing a crime.

“Who knows whether they deter others or not?” he said. “You can’t measure a crime that’s not committed. I think deterrence may be the least important factor.”

COMMENT #4:  O.K. guys – this is a very nice academic exercise, but beneficial – I doubt it.   So as a start let me provide a list of things that might help to deter white collar crime:

  1. Make it known that you, from time to time, will have random auditors reviewing departments, processes and procedures – and THEN DO IT.  For example, you might have a plant (yes, fake employee) come into a department and test the integrity of workers.
  2. Post examples of folks who have committed a crime and the punishment that they received, and without violating some perceived right – make sure that those who internally violate are known and prosecuted.  If folks feel that their indiscretion will be swept under the table they are more likely to commit the crime.
  3. Self serving statement – but hire someone other than an academic to come in and speak to your folks.  You have no idea the impact it has when employees are faced with someone who committed the crime and then did the time.  I, or folks like me, make it real and the more real you can make it the more someone will think before they take some “white collar crime” action.
  4. Consistently keep the message of “choices and consequences” before them.  With companies I consult with, I often find that different mediums shared frequently has a positive impact.  It is said that a person might see an advertisement seven (7) times before they really consider buying.  If that is true in marketing, then aren’t we marketing good behavior.  Yes…of course so!  So, we need to approach behavior marketing the same as product marketing.  All we are looking for is a positive outcome.

FINAL QUESTION:  Do you think that “white collar crime” can be deterred and if so, how?  YOUR COMMENTS ARE WELCOME!


Bernie Madoff, Allen Stanford – Tell Tail Signs You’re Being Conned! Comments from Fraud Prevention Expert Chuck Gallagher

March 6, 2009

I saw a great article in Time today entitled: How to Spot a Ponzi Con Artist? Follow the Yachts by Robert Chew.  (see article here.)   I must admit after talking recently to many of the folks who were scammed by Gordon Grigg, I would hear similar tales of loss and lifestyle – their loss and his lifestyle.

While many of my readers are regulars I am constantly reminded of the new faces who read this blog for the first time.  Knowing that, this blog entry will be less about others and more about my past.  From the past one can learn much about the future.  You see, I, too, was a fraudster.  That is not something I am proud of – in fact, it is a fact that I wish were not there.  However, I cannot change my past, so over time I have come to embrace it, share it and learn from those mistakes.  My openness is designed to bring awareness and hopefully prevent others from falling prey to those who would defraud.

THE TIME MAGAZINE ARTICLE:

The article starts with these paragraphs: ponzi_spotters_0304

With so many Ponzis and so little time to know if you’ve been hoodwinked, there are some red flags even the most trusting investors can bank on: yachts, mansions, jets and women. If your investment adviser is dabbling in any of the above, there’s a good chance you’ve been Ponzi-ed or are about to be.

Creating the illusion of fantastic success, of course, is Chapter 1 in the Scammer’s Handbook. But many among the most egregious alleged billionaire bamboozlers, like R. Allen Stanford and Bernie Madoff, are taking the art of thievery to the next level. Some don’t even bother opening an investor account when new monies come in; they just go shopping. It’s enough to make Gordon (“Greed is good”) Gecko blush.

Arthur Chew is dead on when he says, “Creating the illusion of fantastic success is Chapter 1 in the Scammer’s Handbook.”  Actually there, of course, is NO Scammer’s Handbook.  But, Chew is right about the illusion.

As a ethics and fraud prevention speaker, I openly discuss the steps that led up to the choices I made to enter into the world of fraud.  At first I stuck my toe into that world when I was behind on my  house payment.  I stole money from a client – tricking myself into believing I was only “borrowing” money.   That was foolish – borrowing is borrowing and theft is theft, and when you take money that isn’t yours without anyone’s knowledge – it is theft.

That said, when I repaid the stolen money I also learned it was easy.  I  took again, with minor repayment and again and again.  But to Chew’s point, the stolen funds were invested into my lifestyle.  Now, I didn’t live like Bernie Madoff, but I did live well, especially for the community that I was living in.

The Time article goes on to say:

The charge alleges Walsh and Greenwood gave themselves $8.2 million in employee “advances” and another whopping $160 million for personal expenses. The complaint detailed funds’ being used for buying rare books at auction, purchasing expensive horses, laying down $80,000 for a Steiff teddy bear and providing the ex–Mrs. Walsh with a $3 million residence.

Also last week, North Hills Management, a New York City–based $40 million investment fund run by Mark Evan Bloom, was charged by the same agency with “misappropriating for personal use” more than $13 million from its clients’ fund.

While my lifestyle was nothing like that – everything is relative.  I lived in an upscale home.  While there I was building another home which would have been in the top 1% in my community.  I drove a BMW, then a Jaguar, then a Mercedes, and finally a BMW.  I purchased rare “autographs” that I deemed to be collectibles.  Our clothes were top of the line and we wanted for nothing.  The “illusion” was appropriate for where I lived and the level of my fraud.

As I write this I am saddened by the words.  It is difficult to state what I did, knowing that I knew better all the time.  I created an amazing illusion and got caught up in it myself.  Having talked with many victims of frauds, just like the one I committed, I know that the fraudster, just like the victim, can be caught up in the illusion.

129Now I need to be careful with what I say here – for fear that my readers might think I am trying to shift blame – I am not!  But, the truth is, my crime – or the crimes of Madoff, Stanford, Grigg and others in the news today – could have been cut short if those closest to them might have been alerted by their lifestyle.  In my case, I was tax partner in a CPA firm.  It is fairly obvious that my partners knew what I was making from our firm.  I knew their income and they knew mine.  So a fair and reasonable question is – how could I live a lifestyle far more lavish than they?  If we all knew our incomes, unless I had a vast inheritance – which they knew I didn’t – then the question would be where is the money coming from?

Let me repeat the question:  Where is the money coming from?

When that question is asked – then there is a chance that unethical – if not fraudulent – behavior could be uncovered or discovered.  So there is no misunderstanding, I am not faulting my partners for my poor choices.  I made them.  I am responsible and accountable for them.  I paid the price for them.  That being said, had anyone – my family, my partners, anyone – questioned my income or income source, I would likely have been stopped in my tracks.

OUTCOME:

Today as I speak to groups nationwide I state: “Every choice has a consequence.”  I live that daily.  The choice I have made over the years have all had consequences – some good and some bad.  In my case, even though I made complete restitution plus interest to those I defrauded, I did spend time in Federal prison for my crimes.  Again, I am not proud of that outcome or my past choices.  But I am living proof that ILLUSION is a grand part of the fraud scheme.

AS ALWAYS – I AM OPEN TO YOUR COMMENTS: