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!