White Collar Crime in Banking

Introduction To The Problem – The Legal Issue.

Black’s Law Dictionary (8th ed. 2004) defines fraud as “a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.” (www.blackslawdictionary.com) The injury in fraud is usually depriving a person of money or other property that rightfully belongs to that person. Fraud crimes are classified according to the type of transaction in which the deception occurred. Fraud is a serious and broadly defined criminal offense. Criminal fraud is a charge brought against a business, as well as against an individual (a business cannot be imprisoned, as well as hit with substantial fines). (http://www.rhgm.com/CM/FSDP/PracticeCenter/Criminal-Law/White-Collar-Crime.asp) The Federal Bureau of Investigations defines fraud as deliberate deception used for unlawful gain. The term “white collar crime” was coined in 1937 by a professor Edwin Sutherland. The proliferation of white-collar crime in the banking industry has introduced a multitude of fraud crime. Mortgage fraud and identity theft top the list. This vast amount of crime inspired the FBI to create “Operation Continued Action”–a national takedown of organized groups and individuals targeting U.S. financial institutions. (http://www.fbi.gov/page2/sept04/swecker092204.htm) These types of white-collar crimes usually involve insiders, an employee or official.

The legal issues that surround these types of crimes are many mostly all financial in nature. These crimes frequently involve check kiting, Ponzi schemes, credit card fraud, identity theft; larceny and blackmail just to name a few. Other legal issues include conspiracy, embezzlement, tax evasion and money laundering. (http://www.ckfraud.org/whitecollar.html)

Background Of The Study- Origins Of The Legal Issue.

If you were to research the beginning point of white-collar crime, you would run into a phrase more popular in use. You would run into the phrase “Organized crime”. (http://www.heritage.org/Research/LegalIssues/lm14.cfm) Organized crime has been around since Prohibition in the 1900s. Familiar names such as Al Capone rose in fame as bootleg liquor birthed the first crimes committed in pursuit of financial gain. “In Russia, organized crime is still rampant with its hooks into the banking sectors and financial industries it reports widespread corruption through out.” (http://www.worldbank.org/html/prddr/trans/janfeb97/art4.htm)

One example of white-collar crime in the banking industry is money laundering. An article written by Rachel Manney, MONEY LAUNDERING: The Global Threat to the Integrity of Financial Systems in the 1990s reports that is has been a problem within the United States for over 30 years. Organized drug cartels are credited for fueling this offshore laundering process. “The U.S. Justice Department’s 1996 investigation into Citibank’s alleged laundering of $100 million of illegal income by Raul Salinas de Gortari, the brother of the former Mexican President, Carlos Salinas de Gortari. The third wake-up call for U.S. law enforcement authorities involved The Bank of New York (BONY) and Russia. Two BONY employees and certain of the bank’s Russian participated in siphoning $7 billion [US dollars] out of Russia and into three BONY accounts.”(http://www.wilmott.com/pdfs/020120_moneylaundering.pdf)

Statement Of The Problem – Identify The Problem The Legal Issue Is Causing In Society/Business World.

“The International Monetary Fund (IMF) has stated that the aggregate amount of money laundered in the world could be somewhere between two and five percent of the world’s gross domestic product. Using 1997 statistics, these percentages indicate that money laundering ranged between US Dollar (USD) 590 billion and USD 1.5 trillion.” (http://www.wilmott.com/pdfs/020120_moneylaundering.pdf) If drug trade and industry are fueling money laundering alone, you can only imagine the legal implications of these types of crimes. It could range from fraud to murder. Everyone is well aware of the societal effects of drug usage and sale.

In 2005, a former bank employee was charged with embezzling more than $3.3 million dollars from her customers’ accounts. The article goes on to state that she spent most of the stolen funds, actually 80% of the stolen funds in the casino. This speaks to a gambling issue to me, which has grave implications in society. It is an addiction just like drugs but the worse effect was on the account holders. The article states that she targeted Latino accountholder more importantly a poorer working class group. (http://www.highbeam.com/doc/1G1-148410489.html)

Bernard L. Madoff, former chair of the Nasdaq Stock market and founder/owner of Bernard L. Madoff Investment Securities LLC perpetrated one of the greatest Ponzi schemes known.  Mr. Madoff, plead guilty to 11 criminal charges associated with a $64.8 billion dollar fraud that took place over two decades.  In the early 1990’s as the economy slipped in to a recession, Madoff desired to continue meeting the high rates of return that he had promised.  The funds contributed by investors were never invested but instead were deposited in to a business account with Chase Manhattan.  Madoff covered his tracks by having computer programmers write programs that covered their fraud from the regulators and investigators, false trading activities, foreign transfers, and false SEC filings.  Customers who withdrew their funds were paid directly from the business account and told returns were based on Madoff’s own “split-strike conversion strategy”.  Mr. Madoff claimed to have had every intention on returning to legitamite activities but this proved impossible as he would have never been able to match up the paper trail.( www.ft.com/madoff)

The financial damage to society as well as the offspring implications such as addiction and further criminal activity shows the adverse impact of white-collar crime on society.

Purpose Of The Research.

The purpose of studying white-collar crime and the issues that it creates stems from an undercurrent of thought that those responsible and or convicted of such do not receive the same harsh treatment as what is entitled “street crimes”. (wikipedia.org/wiki/Street_crime) While growing up, it was always just understood that a person convicted of a white-collar crime would serve time almost in luxury as opposed to someone who robbed a bank or knocked someone over the head. I remember looking in a magazine at a new federal prison and this place looked like a five star hotel. The booths that the prisoners sat in to chat with their visitors had glass clear walls and glossy finished cherry wood as counters. The chairs looked as if they came right out of the IKEA catalog, page 87. Now compare that whole scene to the over-crowded state prisons we have heard multiple horror stories with which we are very familiar. There are episodes of “Locked Up” that I have watched and wondered how it always seems that it is just under the amount of space needed for the prisoners housed there. It does not take much to remember pictures or movies about visitor chat rooms with the thick, scratched plexi-glass, painted metal chairs, dirty floors and walls and broken phones. This disparity presents issues within society itself and its’ views about crime and the perpetrators. If you think about the social status alone, people in a higher social class like bank executives or politicians commit most white-collar crimes. Street crimes on the other hand are usually committed but those in a lower socioeconomic status like the corner boys or drug addicts.

Research Questions

The general perception of crime usually does not focus on white-collar deception. When you think of criminal, images of hard-edged, non-shaven, pinstripe wearing shackled thug come to mind. Street crime is viewed as a horrible disease that afflicts society with murder, rape and assault being among some of the most heinous crimes perpetrated against their victims. The image of a business suit, a polished, affluent individual never really pops into mind. However, the face behind white-collar crime, especially in the banking industry is exactly that.

There is a long list of crimes committed within the banking industry. Fraud being the most common comes in many forms and entities. Embezzlement and money laundering run a close second and third most common instance of white-collar crime.

Bank fraud in a largely encompassing title that falls under theft, for a multitude of different frauds committed in a banking environment with the basic premise being the intent to deceive and cause the true owner to give up possession of their property. These frauds are:

• Check Kiting – writing checks that draw against uncollected funds. For example, a person would have two separate accounts, each at a different bank. Account 1 is at one bank and Account 2 is at a separate bank. The person then writes a check for a certain amount drawn because one but there is no actual cash there, deposits it into Account 2, and withdraws the cash against the deposited check before it actually clears. Check kiting takes advantage of the “float” time it takes for the check to present to Account 1 to be paid. These “bad checks” when presented, will not be honored because of non-sufficient funds (NSF) and the account usually is closed. Depending on the amount, checking kiting and the writing of bad checks is usually prosecutable under the laws prohibiting larceny better known as theft. (http://www.answers.com/topic/check-kiting)
• Check fraud – The role that checks play in fraud range from alterations, counterfeiting, forgery and checks drawn on closed accounts. Altered checks are valid checks written to a payee that have been changed. These alterations are done with chemicals or another means of erasing either the payee’s name or the amount to be paid and sometimes even both. Counterfeiting – Counterfeited checks are a horse of a different color. The checks are fake checks written against valid accounts. Corporations or accountholders with very large balances are targeted because there is a lesser chance of the fraud being discovered or if it is discovered, enough time has elapsed that the criminals can get away with it.

In recent times, a new fraud has surfaced better known as the “Nigerian Counterfeit Cashier’s Check Scam”. This scam can be played out in numerous ways but it is based on a payment being made, usually from overseas, in the form of a cashier’s check with the payee requesting that any additional or left over funds be wired back to them. The website www.counterfeitcashierscheckscam.com contains an excerpt of and different versions of this scam:

“…a person from overseas posing as a potential buyer of an item (such as a motorcycle or an automobile)… In a later email the overseas person tells the seller that they are overseas, but have a colleague in the United States who owes them money (such as $10,000), and they will instruct their colleague to send the seller a cashier’s check for the sum of $10,000. The overseas person informs the seller to deduct the cost of the item and to send (wire) whatever balance remains to him (so if the seller has something for sale for $5,500, then they will wire the overseas person the $4,500 difference). The overseas person indicates in an email that he has already made shipping arrangements, and tells the seller that when the check is cashed, he will inform his shipping agent to pick up the item. The overseas person also requests a name and address to where the check should be sent, saying that they will send the check immediately (and believe it or not, the cashier’s check does arrive quickly…..it often comes by Fed Ex). Typically, the seller will receive between two and five emails before the overseas person requests an address for mailing a check.”

After the seller receives, the cashier’s check and deposits it to their bank account, the bank will let the seller (the banks customer) know that the funds are available usually within 24 hours. Some people wait a week though just to make sure everything seems fine for the cashiers check, and with the funds still showing in their bank account, the seller sends the remaining balance of money to the overseas persons’ designated account (often the money is sent via Western Union or Money Gram). Several days later the bank will determine that the cashiers check is counterfeit, and will remove (deduct) the cashiers check amount from their customers account. (http://www.counterfeitcashierscheckscam.com)

• • Empty deposits/ Uttering – “This crime occurs when an account holder makes a deposit into an automated teller machine (ATM) but there is no actual cash or check. The envelope is empty but the accountholder can then withdraw money against that deposit up to a set limit by their bank.” (http://www.criminalfraud.com/bank-fraud.php)

In the same vein of fraud, uttering is the offense committed when a person signs and presents a check for which they know has no funds. The check is considered “uttered” once it is put into circulation. (Anderson, T. & Gardner, T., p. 332)

• Forgery – Forgery is defined as “the act of criminally making or altering a written instrument for the purpose of fraud or deceit.”(http://www.lectlaw.com/def/f056.htm) This crime can be performed in a variety of ways. The most common is the altering of a document that already exists. There is also the endorsement using another person’s name or an attempt to duplicate another person’s signature. Fake identification cards can be classified as a forgery because they are documents used to identify and when false is then used to defraud the person or establishment where they are presented. Check-forging rings are large groups of organized criminals, which usually tie into other crimes such as burglary, purse snatching and pick pocketing. These means are used to obtain authentic checks, identification to use in the forgery and additional documents. (Anderson, T. & Gardner, T., p. 334)
• Credit Card Fraud – Credit cards are issued with the intent of providing short-term credit. That line of credit is then used for unauthorized purchases. This type of fraud in the banking industry goes hand in hand with identity theft. The physical possession of the actual card is not needed in order to carry out this form of theft. The numbers off the card are used to make purchases online and via the telephone without actually having the card in your possession. (www.lectlaw.com/files/ban16.htm)

Embezzlement means to steal (money, etc. entrusted to one’s care); take by fraud for one’s own use. (http://www.yourdictionary.com/embezzlement) It is the crime of misappropriation or wrongful use of the funds entrusted to the embezzler. The difference between this crime and fraud is that with embezzlement, the perpetrator has possession or is responsible for the correct usage of the money however, they are stealing. A good example of this would be a CEO who has full control over the finances of the company skimming portions of the profit off the top and not reporting these earnings along with the other profit. This form of white-collar crime gains its place because it is done within the business environment. (Anderson, T. & Gardner, T., p. 331)

The severity of embezzlement is determined by the amount of loss to the victim where as larceny, which is street crime, theft, is determined by the perpetrators gain. 18 U.S.C. § 656: US Code – Section 656 states:

“Theft, embezzlement, or misapplication by bank officer or employee… Whoever, being an officer, director, agent or employee of, or connected in any capacity with any Federal Reserve bank, member bank, depository institution holding company, national bank, insured bank, branch or agency of a foreign bank, or organization operating under section 25 or section 25(a) (!1) of the Federal Reserve Act, or a receiver of a national bank, insured bank, branch, agency, or organization or any agent or employee of the receiver, or a Federal Reserve Agent, or an agent or employee of a Federal Reserve Agent or of the Board of Governors of the Federal Reserve System, embezzles, abstracts, purloins or willfully misapplies any of the moneys, funds or credits of such bank, branch, agency, or organization or holding company or any moneys, funds, assets or securities entrusted to the custody or care of such bank, branch, agency, or organization, or holding company or to the custody or care of any such agent, officer, director, employee or receiver, shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both; but if the amount embezzled, abstracted, purloined or misapplied does not exceed $1,000, he shall be fined under this title or imprisoned not more than one year, or both.” (http://codes.lp.findlaw.com/uscode/18/I/31/656)

Attorneys specific to white-collar crime defense state: “In order to convict someone of embezzlement, the prosecution must establish the following:

• The accused has or had a fiduciary responsibility to the person or entity he or she allegedly embezzled from
• The money stolen was obtained through fraudulent means made possible by the accused position of employment
• The accused acted intentionally and knowingly to embezzle from his or her employer
• The stolen assets were taken through financial manipulation or fraud

In each case, the prosecution must not only prove theft occurred they must prove intent.”(http://www.vairariley.com/PracticeAreas/Embezzlement.asp) In cases of embezzlement, defense attorneys seem to weigh heavy on proving that although money was taken, it does not necessarily constitute embezzlement. They even go so far as to point the finger of blame to the accounting firms that did not discover the missing funds.

Money laundering as mentioned earlier, is the “concealing or disguising how illegally obtained funds (such as from drug trafficking, gun smuggling, corruption, etc.) is generated to avoid a transaction-reporting requirement under state or federal law.”(http://www.bitpipe.com/tlist/Money-Laundering.html) It occurs in three stages:

1. Placement – The actual depositing of monies into financial institutions or the conversion into negotiable instruments such as money orders or cashiers checks. This is currently very difficult to do because banking regulations require any deposits over $10,000.00 to be reported.
2. Layering – The act of transferring funds through different accounts in an attempt to hide their origins and criminal means. This is often achieved by sending funds to banks outside of the United States. Most of these transactions are wire transfers, which prove to be difficult to trace by law enforcement agencies. And last but not least,
3. Integration – The funds are finally untraceable and are transferred back into the United States to be mixed in with funds of legitimate origin. (http://legal-dictionary.thefreedictionary.com/Money+Laundering)

Money laundering has become the focus of many investigations, especially after 9/11. It is a common occurrence for terrorist cells to use this activity to generate and maintain funding for their operating cells. It is their personal line of financing. Organized crime is linked to money laundering. Drug sales are the generator of the illegal funds that also tie into terrorist activity as well as generate revenue on its own. Drug cartels frequently launder their monies through American banks thus causing the government to crack down on their operations and establish special task forces to break up these rings. (http://legal-dictionary.thefreedictionary.com/Money+Laundering)

Prevention

The most important precaution to combat white-collar crime in banking is the creation of the Sarbanes-Oxley Act of 2002. The necessity for such an Act came from the corporate/accounting scandals that companies such as Enron and Adelphia were embroiled in. The scandals cost investors and company employees billions of dollars and struck fear in the country as the status of the nation’s securities markets were unknown. The Karl Nagel & Company states the legislation, which does not apply to privately owned companies, has “…eleven titles that cover:

• The Public Company Accounting Oversight Board-
• Auditor Independence
• Corporate Responsibility
• Enhanced Financial Disclosures
• Analyst Conflict of Interest
• Commission Resources and Authority
• Studies and Reports
• Corporate and criminal fraud liability
• White-collar crime penalty enhancement
• Corporate tax returns
• Corporate fraud accountability

The SOX Act also includes five key provisions:

• Section 302: Corporate Responsibility for Financial Reports: requires that the executive officers and financial officers of a public company sign off on the completed financial documents. Doing so is an admission that to the best of the individual’s knowledge the information within the report is accurate and contains no false statements and that all relevant information has been provided to the audit committee. The provision also requires the officers to create, evaluate, and give their opinions on internal measures that combat fraud.
• Section 401: Disclosures In Periodic Reports: Requires financial statements to be accurate and that any off-balance sheet transactions and liabilities are disclosed.
• Section 404: Management Assessment of Internal Controls: requires that a company publish in its annual reports the measures and controls used in reporting financial information. The companies accounting firm in the same document will have to confirm the measures and their effectiveness.
• Section 409: Real Time Issuer Disclosures: Requires companies to provide in laymen’s terms any changes in the company’s financial status.
• Section 802: Criminal Penalties for Altering Documents: this section states that a person who willfully destroys, conceals, or makes changes to documents can receive fines and/or a prison term up to 20years.”( www.sarbanes-oxley.com)

In an effort to gain control over and stop the laundering of illegally obtained funds, the FDIC states that certain Acts were instituted. Below appears a timeline of these Acts:

“History of Anti-Money Laundering Legislation

1970 Bank Secrecy Act

• • Required banks to report cash transactions over $10,000 via the Currency Transaction Report (“CTR”).

1986 Money Laundering Control Act

• Criminalized the act of money laundering;
• Prohibited structuring transactions to evade CTR filings; and
• Introduced civil and criminal forfeiture for BSA violations.

1988 Money Laundering Prosecution Improvement Act

• Expanded the definition of financial institution to include businesses such as car dealers and real estate closing personnel and required them to file reports on large currency transactions; and
• Required the verification of identity of purchasers of monetary instruments over $3,000.
  • • 1990 Bank Fraud Prosecution and Taxpayer Recovery Act of 1990 (Crime Control Act)
• Updated the FDIC Statement of Policy issued pursuant to Section 19 of the Federal Deposit Insurance Act that prohibits, without the prior written consent of the FDIC, any person from participating in banking who has been convicted of a crime of dishonesty or breach of trust or money laundering, or who has entered a pretrial diversion in connection with such an offense.

1992 Annunzio-Wylie Money Laundering Suppression Act

• Added Sections 18(w) to FDI Act which provides for the revocation of federal deposit insurance of institutions convicted of certain money laundering crimes;
• Required Suspicious Activity Reports and eliminated criminal referrals; and
• Required Verification and recordkeeping for wire transfers.

1994 Money Laundering Suppression Act

• Required banking agencies to develop anti-money laundering examination procedures; and
• Streamlined CTR exemption process.

1998 Money Laundering and Financial Crimes Strategy Act

• Required banking agencies to develop anti-money laundering training for examiners;
• Required Treasury and other agencies to develop a National Money Laundering Strategy; and
• Created the High Intensity Money Laundering and Related Financial Crime Area (“HIFCA”) Task Forces.

2001 Uniting and Strengthening America by Providing Appropriate Tools to Restrict, Intercept and Obstruct Terrorism Act (USA PATRIOT Act)

• Required government-institution information sharing and voluntary information among financial institutions;
• Required verification of customer identity program;
• Required enhanced due diligence programs, and
• Required anti-money laundering programs across the financial services industry.” (http://www.fdic.gov/regulations/examinations/bsa/bsa_3.html)

Governmental agencies were established to prevent and regulate banking activity. The Federal Deposit Insurance Corporation (FDIC) was created by Congress to maintain stability in America’s financial system. “Its mission is

• examining and supervising financial institutions for safety and soundness and consumer protection,
• insuring deposits, and
• Managing receiverships.”(http://www.fdic.gov/about/mission/index.html).

The Guilty Are Prosecuted

Until the Sarbanes-Oxley Act of 2002, the penalties for white-collar criminals were very relaxed. In approving this act, Congress granted the U.S. Sentencing Commission (USSC) the power to create more harsh penalties for those committing crimes of securities, accounting, or pension fraud.

The emergency amendments provide significant sentencing enhancements for white-collar offenses that affect a large number of victims or endanger the solvency or financial security of publicly traded corporations, other large employers, or 100 individual victims. Officers and directors of publicly traded corporations who commit securities violations are targeted for particularly substantial increases in penalties. For example, an officer of a publicly traded corporation who defrauds more than 250 employees or investors of more than $1 million will receive a sentence of more than 10 years in prison (121-151 months) under the emergency amendment, almost double the term of imprisonment previously provided by the guidelines. (http://www.ussc.gov/PRESS/rel010803.htm)

The initial amendments were temporary and included measures to more strictly punish people who impede an investigation by destroying documents. Previously one could be sentenced to as little as 18 months for destroying evidence. Under the temporary sentencing guidelines the penalty for such actions would earn one 30 to 37 months in prison and the permanent guideline allows for sentences up to 20 years. The USSC also increased the penalties for high-dollar fraud and consolidated the sentencing guidelines for fraud, property destruction, and tax related offenses.

Below appear examples of cases involving white-collar crime in business:

Money Laundering

In Fort Lauderdale, FL County Commissioner Josephus Eggelleton has plead guilty to a single count of conspiracy to commit money laundering. In 2006, undercover FBI agents met Eggelleton and as a result made a $5,000.00 contribution to his charity for underprivileged youth called Golf Oriented Leadership Foundation. Eggelleton made it clear that if the agents wanted to do business in the Bahamas to let him know.

Eggelleton’s co-conspirator’s were local businessperson Joel Williams, Ronald Owens, and attorney Sidney Cambridge from Nassau, Bahamas. The accounts were setup in St. Croix and the Bahamas by Cambridge with Williams and Owens acting as the intermediaries. Overall, the four are alleged to have laundered over $900,000 in funds they believed to have come from illegal activities. If convicted the foursome faces maximum penalties of 20 years in prison and fines up to $500,000. (http://www.miamiherald.com/news/miami-dade/v-fullstory/story/1352482.html)

Embezzlement

Former National Penn Bank vice president Edward Mawhinney has been sentenced to 45 months in prison and order to pay $540,000 in restitution on top of the $150,000 that he has already paid. Mawhinney fraudulently opened lines of credit in the names of bank customers using the funds to pay off personal debts and to purchase a house. To mask his illegal activity Mawhinney created forged the customer’s names and created false documents. In addition to the lines of credit opened for his own personal use Mawhinney also supplied loans to unnamed third parties without National Penn’s approval and had delinquent loans paid down or in full. In all, nearly $6.2 million of National Penn’s money was stolen or misappropriated. (http://philadelphia.bizjournals.com/philadelphia/stories/2006/12/18/daily40.html)

Bank Fraud

Ehud Tenenbaum the hacker known as “the Analyzer” best remembered for having hacked the computers of the Pentagon, NASA, The Israeli Parliament, and Hamas has recently been extradited from Canada to the United States on charges of fraud that netted 10 million dollars from banks in Florida, California, Texas, and Indiana. Tenenbaum is accused of hacking the computer systems of institutions to obtain personal identification numbers that he would later sell. He has also been caught hacking into a banks system, increasing the amount of money in an account and withdrawing the funds from an ATM. Tenenbaum faces up to 15 years in prison if found guilt