Fraud

Alan Doig

• Publisher: Willan
• Year: 2013
• Print ISBN: 9781843921721
• eBook ISBN: 9781134013869
• Edition: 1
• Topic: Social Sciences
• Subtopic: Criminology
• Index: Social Sciences

Fraud remains one of the most important crimes and causes billions of pounds of losses each year, many thousands of people are employed to try to prevent it, but it has remained largely neglected in the literature.

This book provides comprehensive coverage of the main issues involved in fraud, its definition, costs, the nature of the offenders involved in committing fraud, and the issues involved in fraud investigation. It is written by one of the foremost authorities on the subject, and covers fraud in the widest sense, ranging from benefit fraud to tax evasion, credit card fraud, and paying particular attention to fraud using the internet. A wide range of case studies are presented, portraits are provided of the ways in which a large number of organizations seek to deal with fraud.

This book will be essential reading for anybody with a professional interest in fraud and its prevention, as well as the wide number of courses within law, criminology, social policy and business and management.

Chapter 1

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Fraud — the academic and practitioner contexts

The origins of white collar crime and the study of fraud

Fraud has been a defined subject of academic study since the mid-twentieth century but its location within an academic discipline has fluctuated depending on the enthusiasm of individuals or the disciplinary perspectives of groups of academics. Persuading people to part with their money by using deception or misrepresentation through words and documents rather than threats or violence by means of a weapon or physical intimidation, has, to put it simply, been seen as a crime that assumes some sort of relationship between the perpetrator/persuader and the victim/persuaded. That relationship also assumes that one is, for example, the client, customer, contractor, or colleague of the other. In other words, unlike the conventional view of theft, offender and victim (whether persons, public bodies or corporate entities) were not unknown to each other — or at least had some notional basis on which to have a relationship (bogus or genuine).¹ This would usually involve the offender having something the victim wants (or can be persuaded they want), or is eligible to (or satisfies the conditions to be eligible to) secure something from the victim. Again, put simply, that contact or relationship was seen as normally taking place in a work or organisational context involving people dealing in paper and working at desks — hence its general description as an aspect of white-collar crime and its inclusion as a subject of study within that context.

The genesis of the study of white-collar crime lies in the pioneering criminological study of business deviance (Sutherland 1983; he first used the term ‘white-collar crime’ in a conference address in 1939 and then in the title of the subsequent academic journal paper the following year; his book, minus a few names, appeared in 1949 and the full version in 1983). Sutherland's investigation of business or corporate crime was based on studying what might loosely be termed occupation, class and social status as the determining characteristics, with a particular permutation — people in senior positions as managers, executives and officers — used for the basis of his term ‘white-collar.’ The term denoted the offenders rather than the offences although, here, these were also limited to the defining context of the offender. Thus a senior manager could shoot a neighbour but that would not make him or her a ‘white-collar murderer.’ The investment broker who stole his neighbour's savings would be a ‘white-collar embezzler.’

Sutherland's argument was that the prevailing theories — such as poverty or genetic disposition (‘social and personal pathologies’) — were not an adequate explanation for certain types of criminal behaviour. He argued that criminal behaviour might also be linked to wealth and power, and in the hands of those senior enough to make the necessary decisions. (This also meant that, because such criminals could afford good lawyers, punishment rates were much lower and thus they were less likely to show up in the crime statistics as an identifiable group over and above the usual suspects.) His thesis was that ‘persons of the upper socioeconomic class’ also engaged in criminal activity. This activity he termed white-collar crime, loosely defining it as ‘a crime committed by a person of respectability and high social status in the course of his occupation’ (Sutherland 1983: 7). What Sutherland also argued at the time he was writing (in 1949), was that such crime could also encompass a wide range of activities — for example, procurement, banking, car repairs — and groups — for example, doctors — and that the cost of such crime was probably several times as great as the financial cost of all the crimes which are customarily regarded as the ‘crime problem’ (1983: 9). His focus, however, was very much on corporate wrongdoing in its widest sense (such as restraint of trade, unfair labour practices and stock manipulation)² which he clearly distinguished from financial crime against the corporation — he called embezzlement by a low-level employee ‘the most foolish of the white-collar crimes’ (1983: 237).

Sutherland's themes have been developed, expanded and adapted by academics subsequently (see Geis 1968; Geis and Meier 1980; Geis and Stotland 1980; Johnson and Douglas 1978). In their 1980 edited book, Geis and Meier included material on corruption while in the same year Geis's edited book with Stotland discussed computer-related crime and management fraud (including fraud by managers against the company). The post-Sutherland US work tended to avoid too much attention to definitions, devoting more pages to motivations, deterrence, criminality (including the concept of the criminogenic nature of business as a consequence of the need to deliver sales and profits), and an expanding range of offenders (including pharmacists and nursing home owners). The overall trajectory of the research has stayed generally within the sociology/criminology academic disciplines, with white-collar crime increasingly researched through the business organisational deviance perspective. Here the areas of actual or potential criminality now included any form of misrepresentation for profit, and extending to include charities, home improvements, food and academic qualifications as areas where white-collar crime also occurred.

There was, as a consequence of the developing research, a recognition that Sutherland's ‘wealthy and powerful’ distinction was too restrictive for such a range of perpetrators and that the focus should be on the crime — ‘white-collar crime’ as opposed to the ‘white-collar criminal.’ As Edelhartz (1978) noted, the character of white-collar crime should focus on the crime rather than the perpetrator: ‘The character of white-collar crime must be found in its modi operandi and its objectives rather [than] in the nature of the offender’ (1978: 45). In the 1980s and into the 1990s, the range of research in the US did look more at the crime, extending further into the fields of corruption and organised crime where many of those involved would clearly not fit into Sutherland's definition of ‘a person of respectability and high social status.’ The expansion of academic study — much of it based on fieldwork — was matched by an extensive and detailed tradition of investigative journalism, both mainstream and alternative. Primary source material was provided by publications and reports from a strong Government Accountability Office (the USA's equivalent of the UK National Audit Office, dealing with the accounts of Federal government departments). There was a congressional committee system that regularly exposed fraud, waste and corruption in the Federal public service. Further material emerged from a range of ad hoc official inquiries at national and state level.

Writing on fraud by both practitioners and academics is extensive and often an integral part of the study of white-collar crime. Even before the raft of books explaining the Enron and other corporate collapses, books were published on investment banking corporate self-interest (Auleta 1986), loans fraud (O'Shea 1991) and practitioner approaches to fraud (see, for example, Albrecht et al. 1995). At the same time, the academic focus on white-collar crime includes fraud because the former is ‘committed through the use of some combination of fraud, deception, or collusion’ (Weisburd and Waring 2001: 12). Further, white-collar crime itself no longer solely encompasses those at the top of the corporate structure but all of those for whom ‘changes in our society … have placed the opportunity for white-collar crimes in the hands of a much broader class’ as a consequence of the increase in white-collar jobs and of the expansion in public sector bureaucracies, the changes in technologies, and the development of the credit economy (see Weisburd and Waring 2001: 9). What is noticeable about the academic perspective, is the range of research and debate on fraud, often with a practitioner focus, from the investigation of fraud in the Federal public sector (Light 1993), through specialised issues such as the prevention and detection of financial statement fraud (Rezaee 2002), to developing ethical environments (Cooper 1998).

Contemporary research also continues to analyse motivation, with one contemporary piece of empirical research arguing that, on the one hand, evidence from some white-collar criminals might indicate that their crimes are not always ‘aberrations on unblemished records’ (i.e. that white-collar crime is not always a one-off occurrence) but, on the other, ‘their criminality may reveal little more than they have committed a crime’ (i.e. profiling white-collar criminals does not throw up a distinctive ‘type’ — see Weisburd and Waring 2001: 144, 145). What the authors suggest is that circumstance or context and necessity lie at the centre of white-collar crimes:

Situation plays a central role in explaining participation in crime for most offenders in the sample. The lives of those we have termed opportunity takers and crisis responders do not seem to be characterized by instability and deviance, and there was little in their records that indicated a predisposition to criminality. A specific crisis or special opportunity appears to have drawn otherwise conventional people across the line to crime. Even for those described as opportunity seekers, situational opportunities play an important role in defining why offenders commit crimes at specific junctures. (2001: 145–146)

Many of these white-collar criminals maintain positive attitudes toward conventionality and legality even when participating in crime. Many of those labeled crisis responders are, by and large, conformists, but, in a specific situation, they feel the need to do something they define as wrong in order to deal with some perceived crisis that threatens them, their families, or their companies. Even when committing crime, they accept the fact that they should conform to legal norms, but believe they cannot. People we have defined as opportunity takers also accept more generally legal and conventional norms. Arguably, such people would not have violated the law in the first place if a specific opportunity had not confronted them. Although they do not seek out criminal opportunities, once they appear, opportunity takers decide that conventional norms are holding them up in a specific circumstance. (2001: 146–147)

Generally, however, the authors suggest that seeking to establish the ‘chain of causal events’ which led up to the point of criminal action for either group was not always possible, making the use of systemic pre-emptive, or over-intrusive, controls debatable for a crime that might thus be both deliberate and opportunist. Further, the findings suggested that financial penalties rather than imprisonment would be more effective inhibitors on either group.

The study of fraud in the UK

There remains a limited investigative journalism tradition in the UK³ but despite this, and the much more detailed material available from the public auditors, these are not drawn upon in any significant way for academic study into white-collar crime which has not moved too much from its original sociological/criminological roots, nor has it shifted towards a more empirical focus. Academics in these fields have tended to address the subject on three areas. The first concerns white-collar crime in its broadest sense, developing an elasticity of definition which has moved the subject away from its financial focus. Here it is the range of criminal activity in the workplace or by the organisation that becomes the focus, from pollution to dangerous products. Hazel Croall (2001), for example, lists categories that include: theft at work, fraud, corruption, employment offences, consumer offences, food offences, environmental crime. The breadth of her interest, however, takes a mainstream approach to white-collar crime in its wider sense in that it reflects both US and UK publications where workplace violence, espionage and theft are also now included (see Gill 1994; Giacalone and Greenberg 1997; Davies et al. 1999).

The second area concerns organisational deviance, focusing on two aspects. One aspect is occupational or organisational deviance which has broadened out the subject from the issue of class or status to a more general theme of self-regarding activity by low-status employees, whether stealing stock, manipulating the opportunities presented at the workplace, or defrauding the company or customers in an organisational context (see, for example, Ditton 1977 and Mars 1983). The other aspect continues to focus on business as an aspect of organisational deviance in providing a ‘criminogenic arena’ — ‘the organisation as a weapon, a target, an offender, a scene of crime, a justification, an opportunity, a means, and as a victim’ (Punch 1996: 271). Here managers and executives may not only act deviantly on behalf of the organisation, but also against it. As Clarke (1990: 7) puts it in introducing his book on business crime: ‘It is maintained in this book that crime and misconduct are endemic in business …’. Some of the literature has sought to look at corporate scandals — ranging from corporate killing through financial depredation to specific disasters — through the context of both organisational culture and institutional control (see Clarke 1981, 1986, 1990; Drummond 2003). Others have taken an approach influenced by what Slapper and Tombs describe as ‘partisan scholarship’ (Slapper and Tombs 1999: 232), sometimes termed ‘radical criminology’, where the framework is shaped by what might be termed the crimes of the rich and powerful within a capitalist context.

The third academic area relates to certain areas of social study. Thus criminologists, social policy academics and sociologists touch on benefit fraud (see Dean and Melrose 1995 and below, pp 88). It attracts academics interested in the nature of control and sanction — where there may be a marked contrast between tax and benefits sanctions (Cook 1989) — and those interested in the informal or shadow economy as a sociological or anthropological activity (see Henry 1978). Finally, there is an even smaller subset within this area; these are the economists and econometricians who work on the informal economy. Their work is largely in terms of where does the money go if it is not going in VAT and tax. One of the few contributions came from Stephen Smith (1986) who has argued that the informal economy embraces not only the traditional informal economy activities of moonlighting or tax evasion, but also the wide range of ordinary household activities such as washing up, baby-sitting, and DIY.

Outside these broad categories, there have been a handful of academics — usually with sociology/criminology or legal backgrounds — who have focused more specifically on fraud, and taken a more orthodox legal and crimino-legal perspective. There is also a small (and sometimes high-quality) market of practitioner authors writing on the prevention, detection, and investigation of fraud (see, for example, Comer 1985, 2003; Huntington 1992; Huntington and Davies 1994; Brown et al. 2004; Jones 2004; and Hyland 2005). Academic interest in fraud tends to be focused on the law and institutions, sometimes with empirical research and often in areas where practitioners are interested in the outcome of the research. Clarke's work in the decade from 1980 focused on business scandal and then business crime (1981, 1986 and 1990). It sought to look at both within their contexts which covered the City deregulation and Big Bang era. The work is useful in that it draws attention to a number of phenomena associated with corporate crime. One concerns the concept of anathematisation — the individualisation of the cause of such crime — and of ‘identifying it with the personal character and motivation of those individuals named. The explanation is seen to lie there, rather than in the institutions in the midst of which the offence took place, and which are and will be administered by the rest of the elite’ (1980: 151). Another is the emphasis on the imprecise nature of business regulation, using the 1980s reforms to the City to point up the delicate balance between scandals as drivers for reform, and governments' reluctance to go too far beyond pumped-up self-regulation to avoid alienating business.

Leonard Leigh's book (1982) was a straightforward description of corporate financial offences — theft, corruption, conspiracy to defraud, fraudulent trading, etc. — and those institutions responsible for regulating, investigating and prosecuting them. Leigh acknowledged that he had ignored the impact on society, the causes of the crimes and the psychology of those who committed them in favour of a grounded study of compliance and control environments, in terms of what should be taken seriously by law enforcement and regulatory agencies. He took a sideswipe at the criminologists for their undifferentiated assumptions about capitalism and economic crime, and their apparent failure to distinguish between absorbable criminal activity, and criminal activity likely to damage the economy. He emphasised the perennial issues relating to the cost of fraud, the fragmented nature of the agencies dealing with it, and the issue of sanctions.

Most of the emp...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• Contents
• Abbreviations and acronyms
• Acknowledgements
• A brief introduction to fraud
• 1 Fraud — the academic and practitioner contexts
• 2 What is fraud?
• 3 The cost of fraud
• 4 Who commits fraud, and what types of fraud?
• 5 From need to greed — why is fraud committed?
• 6 Overspill — old frauds, new frauds and fraud in other criminal activities
• 7 How fraud is dealt with — investigations
• 8 Regulation, compliance and audit
• 9 In-house approaches
• 10 Investigation frameworks
• 11 Punishment, asset recovery and prevention
• 12 Conclusion: the futures for fraud?
• Annex: Scotland
• References
• Index