How White-collar Crime Works

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White-collar crime is known for being complicated -- it thrives on that very quality. It can be difficult to even keep up with the jargon of financial terms and violations associated with this type of crime. As a result, unwitting perpetrators sometimes commit these kinds of crimes because they fail to understand the legal terms of their contracts or ethical consequences of their actions. The following list can help you familiarize yourself with the terms and concepts.

Insider trading refers to buying or selling a company's stock while in the know or in possession of material non-public information. If an employee so much as tells his or her friend some important company information and the friend trades that corporation's stock, both buddies could be indicted.

Securities fraud involves some sort of deceit, underhandedness or misrepresentation of a company's performance that manipulates the market and can result in people making bad investments. An accountant would be guilty of this if he or she cooks the books to make it look like a company is bringing in more profit than it is. Insider trading can also fall within this category.

Antitrust violations occur when a company dominates an important market to such an extent that it can work above the competitive free market at severe disadvantage to the consumer, it's considered a monopoly or trust. Actions to abuse this power like price fixing -- artificially raising prices beyond competitive market values -- count as antitrust violations.

Bribery is one of the most well-known types of white-collar crime. It involves a quid pro quo relationship where someone gives a gift to a powerful person in exchange for a favorable decision or use of power. For example, an influential person could agree to accept a kickback or money in exchange for recommending a company's bid for a contract. This practice is unethical when it comes to decisions that should be made on an objective basis because it can result in negative effects for the public, particularly in the cases of public officials.

If a company entrusts an accountant with taking care of finances and the accountant decides to secretly funnel away some funds for himself, the accountant is guilty of a sophisticated kind of theft called embezzlement. Also dubbed "skimming some off the top," it involves a person secretly running away with the funds entrusted to him, often by cleverly hiding the funds in a process known as money laundering.

Taxes are as certain as death and usually just as welcome. Both companies and people have tried to knowingly duck paying taxes, called "tax evasion," by misrepresenting profits or income.

It can be easy for someone who doesn't know the rules to accidentally commit a white-collar crime like insider trading. Discrepancies also occur across cultures. For instance, some countries might not even have the same rules or cultural stigma attached to bribery that Western societies have -- we'll explain this more later.

As we mentioned on the last page, it can also be difficult to visualize the victim while performing some of these crimes. As an example, imagine that you're an accountant for a successful public company that you own stock in. While you are gathering information, you discover that it suffered massive third-quarter losses that will surely devalue your stock. The news won't be released for another few weeks, however, and you suddenly find yourself in possession of worthless stock -- unless, of course, you choose to unload it before the news gets out. It's difficult, at this point, to consider the poor sucker who will buy the stock from you.

Although the above are some of the more traditional examples of white-collar crime, next we'll talk about some other kinds.

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White-collar crime encompasses a whole slew of offenses that might seem ver­y different, but certain characteristics unite them under this same umbrella. They all have to do with deceit, don't use violence and usually come about because the perpetrator had been given the opportunity by virtue of his occupation. Here are less traditional examples of white-collar crime.

Environmental law violations are forms of white-collar crime. In the course of doing business, corporations sometimes take actions -- like dumping toxic waste -- that harm environmental conditions for local residents or wildlife. Businesses and executives, however, might do it anyway and cover it up to avoid paying the costs of obeying safe environmental practices.

What's more, economic espionage and trade secret theft are white-collar crimes as well. You can't just go about stealing important plans, ideas and designs from other people and corporations for financial benefit -- these can count as trade secrets. Stealing them for a foreign government in particular will get you in hot water with government agencies like the FBI.

When a company or person's finances get so bad off that paying debts becomes impossible, bankruptcy, which entails at least a partial forgiveness of debt, can be a savior from disaster. Unfortunately, some choose to abuse this option by making their financial position look worse than it is in order to get out of debt. This is considered bankruptcy fraud.

Insurance fraud entails lying to obtain an insurance payout. Credit card fraud refers to stealing another's credit card information to make purchases. In a telemarketing fraud, the perpetrator poses as a telemarketer in order to obtain personal information for identity theft or scheme others into sending money.

Computer or Internet fraud occurs when someone intercepts a transmission or hacks into a computer to obtain personal information or credit card numbers. In a scheme known as phishing, fraudsters send e-mails that appear to be from legitimate businesses with whom you do business and try to get you to click on a hyperlink to enter your personal identification number (PIN) or other personal information so that they can empty your bank account.

Mail fraud is similar to telemarketing fraud, except it uses mail rather than the phone to con the recipient into sending money or providing personal information.

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­Counterfeiting is another type of white-collar crime. A counterfeiter makes a fake item, such as imitation paper money or even a brand-name product, and tries to pass it off as the real thing for profit. A related crime would be to secretly use shoddy materials for construction to cut costs, which results in unsafe structures.

Other illegal acts, such as obstruction of justice and perjury are also frequently associated with this kind of crime. Some may also consider a corporation's lack of health and safety conditions a white-collar crime, or instances such as when a pharmaceutical company lies about the safety of a drug by skewing the results of lab tests in order to get the product on the market.

­If you've never thought of some of the above examples as white-collar crime, that's understandable. People have different ideas of what white-collar crime is. It's difficult to even assemble a complete list of all the examples under the broadest theories. Scholars have argued about the meaning and scope of the concept since its inception. Before we can understand the concept and the theories surrounding it, we'll need to get some background on the history of the crime itself. Next, find out what the first white-collar crime recorded was.

Although forms of bribery and embezzlement or even monopolistic price fixing surely outdate recorded history, the earliest documented case of white-collar crime law dates back to 15th century England. The law, enacted in 1473, was a response to embezzlement or larceny in what's known as the Carrier's Case, a situation where the agent entrusted to transport wool attempted to steal some of it for himself [source: Salinger].

However, white-collar crime didn't garner much public attention until it became more widespread after the Industrial Revolution in Western industrial societies. As companies rose in power, they were able to squelch competitors and then implement monopolistic policies without fear of being outsold by other companies. The public became enraged when they had to pay outrageously high prices for something that was previously cheap, for no reason other than corporate greed. But, under the law, manufacturers weren't doing anything wrong -- it was perfectly legal. However, popular opinion held that this was corruption that should be illegal and warranted government intervention.

Political movements rallied for laws to prevent monopolistic practices and succeeded in the United States in 1890, when Congress passed the Sherman Antitrust Act. It essentially attempted to make monopolies illegal. Other industrialized countries like England had a history of penalties involving white-collar crime by this time, but none so sweeping as the Sherman Act. Some nations implemented a smattering of these laws, known as competition or antitrust law, but didn't strongly enforce them for very long. Therefore, the Sherman Act is generally considered the first modern competition law [source: Furse].

Stock fraud, as you might guess, is as old as the stock market itself. One age-old scheme called stock touting occurs when someone lies about his company's prospects and promises sure-fire returns for investors. After it's too late, the investors find that the schemer deceived them and instead pocketed the money and ran off. Whereas back in the day, a conspirator might lie to say he had a company that was building railroads in other countries, modern examples include those discovered upon the burst of the dot-com stock bubble, when actual results fell far below promised returns [source: Salinger].

What's more, from time to time, you may receive e-mails from people you don't know asking for your help -- like a wire transfer -- to claim some long-lost fortune or to act as a shipping agent. These schemes are forms of Internet fraud, and they're often perpetrated by scammers working from Internet cafes in Nigeria and Russia. The government of Nigeria -- with financial support from the governments of the United States and Great Britain --- has ramped up its Economic and Financial Crimes Commission to crack down on con artists who spam phony pleas to e-mail addresses throughout the world [source: Green].

More anti-white-collar crime sentiment rose in the late 19th and early 20th century in the United States as a result of a group of journalists known as muckrakers. These writers strayed from regular news reporting to expose corruption in the public and private sectors. They wrote, among other things, of stock fraud, insurance fraud and underhanded practices of monopolistic companies that had fallen through the cracks of the Sherman Act. The muckrakers' exposés incensed the public and resulted in some reform. By 1914, Congress attempted to solidify and strengthen the sentiment of the Sherman Act -- which was used against labor unions -- with the Clayton Antitrust Act. This act went further than the Sherman Act to make particular monopolistic practices illegal.

Nevertheless, in the ensuing decades, white-collar crime continued to rear its ugly head -- or rather, all too often, go about unpunished. This phenomenon led to the birth of the concept white-collar crime as we know it today, which we'll talk about next.

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It's worth taking ­into account that although corruption may be old as dirt, the theories that shape how we think about it are rather new. The concept of white-collar crime didn't come about until well into the 20th century.

A prominent sociologist, criminologist and president of the American S­ociological Society, Edwin Hardin Sutherland, coined the term in 1939 to address what he saw as a bias in U.S. law enforcement. He pointed to how law enforcement focuses on the theft or violent crime of the lower classes and largely ignores the shady practices of the elite, business class.

In his speech to the society, Sutherland questioned the overarching presumption that conditions of poverty are what principally motivate crime. He went on to write an important book on the subject entitled "White-collar Crime" in 1949. His ideas proposed a radical new approach to thinking about crime -- they shifted the focus from the crime itself to its perpetrators.

Clearly, Sutherland's take on this kind of crime proved influential, as the term would eventually make its way into common parlance. But, his specific theories weren't embraced by everyone, and other theorists have pointed to flaws and argued alternative ways to think about white-collar crime.

For instance, statistics have shown that these kinds of crimes aren't restricted to the elite business class -- people from all levels of an organization and social classes commit the kind of fraud Sutherland describes. Anybody can overhear a tip and participate in insider trading, for instance. To account for these stats and align with the American ideal that law shouldn't discriminate based on social class, the terms "corporate crime" and "occupational crime" have been proposed as alternatives.

Another perceived flaw in Sutherland's theory is that it fails to distinguish illegal crime from mere deviant behavior. In other words, under his definition, not all white-collar crime is really crime -- it isn't forbidden by law in the United States or elsewhere. For purposes of sociology, this isn't a huge problem -- in fact, it's helpful. For instance, a broad definition of white-collar crime allows for reform that broadens the official laws against it. It also helps to carry over the concept into other societies outside the U.S. that might have very different ideas and laws of what constitutes white-collar crime.­

­But regarding discussion of law and its enforcement, there's less room for ambiguity. Lawyer and sociologist Paul Tappan has argued to restrict the definition to only that which is illegal. Tappan's strict definition certainly applies to the law school courses and law books that specialize in white-collar crime. However, even among law books, there's disagreement about what falls in the category of white-collar crime. Interestingly, the scope of white-collar crime in a law book is broader, in a sense, than Sutherland's view because it includes some crimes committed primarily by lower-level employees. For example, you probably won't find well-to-do businessmen posing as telemarketers and calling unsuspecting victims.

In the end, no one can agree on a definition or an exhaustive list of what constitutes white-collar crime. All definitions come up short -- even our own humble attempt earlier in this article. For instance, many definitions stipulate that the crimes are nonviolent, but, what about when a company's toxic waste threatens a community's health?

Despite the fact that the concept of white-collar crime is a nebulous social construct, the term comes in handy. We all have a conception of what distinguishes embezzling from mugging. Because of Sutherland's work, we can start to answer these questions: How does white-collar crime impact society, and how can we prevent it? We'll look into both of these questions.

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What makes white-collar crime so tempting? One reason is that a person who steals from a business can rationalize that his or her theft will hardly put a dent in the CEO's handsome salary. In an episode of the television series "The Simpsons," Homer ­Simpson rationalizes committing insurance fraud by figuring that the only effect will be that his boss will have to go without buying an "ivory back-scratcher." Although white collar criminals might like to think that they're cheating only highly-compensated executives, these crimes can have a devastating ripple effect.

­When a company suffers from fraud from any source, it must make up for it by raising costs, which ultimately means higher prices for consumers. It can also mean less pay for employees and even cutting jobs. The effect can continue to ripple when it comes to those employees or investors who now find themselves unable to pay off loans, and credit becomes harder to obtain. When stock fraud or insider trading scandals break out, like they did in the 1980s in the United States, it can cause investors to lose faith in the stock market. Scandals like Enron can also wipe out innocent employees' retirement accounts.

Obviously, this kind of crime can have an enormous impact on society. The exact toll it has, however, is hard to quantify, both because of the wide ripples and the dilemma of finding accurate statistics.

Numerous factors make white-collar crime statistics hard to come by. As we discussed earlier, no consensus exists on a definition, and people disagree on what counts as a white-collar crime. Even if there were a consensus, however, accurate statistics are difficult to gather because the crime goes unreported and unpunished so often. Enron and other publicized scandals, it seems, are only the tip of the proverbial iceberg.

­­Even if fraud is suspected, there are no bloody footprints, no DNA evidence, no eyewitnesses and no smoking gun. One can't conclusively declare as in the board game Clue, "Colonel Mustard, in the kitchen, with the revolver." White collar criminals may leave only complex paper trails that take time and skill to sift through. Now, with the growth of technology and the rise of Internet, white collar computer crime is more rampant, but also more difficult to solve. Local law enforcement teams often find themselves ill-equipped to track down the criminal. The FBI has admitted that arrest rates for white-collar crimes are significantly lower than that for other types of crime [source: Barnett].

Next, we'll look into the laws meant to prevent white-collar crime as well as how those who commit it are punished.

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­One ­of the universal econo­mic dilemmas is how to squelch white-collar crime without discouraging healthy business growth that benefits the consumer.

To combat white-collar crime, the U.S. Congress passed a wave of laws and statutes in the 1970s and 80s. The Racketeer Influence and Corrupt Organizations Act (RICO) was originally associated with mafia-related organized crime, but was soon applied to white-collar crime. Under the law, racketeering included things like embezzlement from union funds, bribery and mail fraud. RICO made it easier to prosecute corrupt organizations and seize assets related to corruption. It also allowed states or people to sue perpetrators for treble or three times the dollar amount of damages. It was under this act that junk bond financier Michael Milken was found guilty of various kinds of fraud and bond market manipulation.

When Enron and similar scandals broke out in the early 2000s, Congress took action. It passed the Sarbanes-Oxley Act (SOX) in 2002 to improve corporate governance -- the relationship and accountability between corporations and their stakeholders.

Regulations to eliminate white-collar crime have evolved in countries outside the United States as well. Western European nations have also instituted laws to prevent corruption. Gradually, Eastern Europe has followed suit [source: Salinger]. Poland, for instance, passed strong anti-money-laundering legislation among other things in 2000.

Because other cultures can have dramatically different social mores, international business deals can put executives in awkward positions. In certain societies like some in Western Africa, it was customary that businessmen or even government officials work on tips -- an important and legal source of income. This is referred to as the dash system, where a dash is a tip. As a result, in order to conduct business, Westerners were expected to offer what amount to bribes under Western laws [source: Salinger]. In Russia and other countries, bribes are sometimes required in order to land a contract -- which can make conducting squeaky-clean business impossible [source: Myers]. It's estimated that truck drivers in India pay nearly $5 billion a year in under-the-table money to keep their rigs on the roads [source: Wharton School].

As international business becomes easier and more common due to the development of communication technology, these disparities in what's considered corruption are both more apparent and more important. Rampant corruption has made it difficult for Western companies to conduct business in some places. To unify the business ethics of the world, a group known as Transparency International attempts to measure the relative corruption among different countries and make it known to the public. It has called on particular countries to shape up [source: AP]. The group believes increased public awareness and the more that businesses establish and adhere to a code of conduct, the more pressure will be on governments and corporations to put up restrictions and institute bribery refusal policies.

­Governments are still figuring out how to punish white-collar crime. Ever since Edwin Sutherland argued that a bias existed in law enforcement that overlooks crimes committed by the elite, people have been suspicious of judges treating white collar criminals with leniency. However, some experts now worry about the opposite phenomenon -- upper-class criminals being held to an unfair, higher standard. Since the United States tightened its federal sentencing guidelines, white collar criminals now face longer sentences with less opportunity for early release [source: Podgor]. Opponents argue that white-collar crime punishment is too harsh, considering that white collar criminals tend to be first-time offenders.

Although white-collar crime may be difficult to define, to prevent and to catch, it isn't necessarily difficult to commit. Learn more about white-collar crime with the links on the next page.

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