Fraud Investigation

Case Studies of Crime Signal Detection

Petter Gottschalk

• Publisher: Routledge
• Year: 2018
• Topic: Law
• eBook ISBN:
  9781351139045
• Subtopic: Auditing
• Index: Law

Investigating white-collar crime is like any other investigation concerned with past events. However, a number of characteristics require a contingent approach to these investigations. This book describes the process of conducting private internal investigations by fraud examiners and presents a number of reports from the United States, Sweden and Norway.

It evaluates a number of internal investigation reports to reflect on the practice of fraud examinations. Empirical studies provide a basis to reflect theoretically on practice improvements for fraud examiners. Rather than presenting normative recommendations based on ideal or stereotype situations so often found in existing books, this book develops guidelines based on empirical study of current practice.

Internal investigations should uncover the truth about misconduct or crime without damaging the reputation of innocent employees. Typical elements of an inquiry include collection and examination of written and recorded evidence, interviews with suspects and witnesses, data in computer systems, and network forensics. Internal inquiries may take many forms, depending upon the nature of the conduct at issue and the scope of the investigation. There should be recognition at the outset of any investigation that certain materials prepared during the course of the investigation may eventually be subject to disclosure to law enforcement authorities or other third parties. The entire investigation should be conducted with an eye towards preparing a final report.

As evidenced in this book, private fraud examiners take on complicated roles in private internal investigations and often fail in their struggle to reconstruct the past in objective ways characterized by integrity and accountability.

1
WHITE-COLLAR CRIME RESEARCH

Ever since Sutherland (1939) coined the term white-collar crime, there has been extensive research and debate about what to include and what to exclude from this offense category (e.g. Piquero and Benson, 2004; Pontell et al., 2014; Stadler et al., 2013). In accordance with Sutherland’s original work, convenience theory emphasizes the position and trust enjoyed by the offender in an occupational setting. Therefore, the organizational dimension is the core of convenience theory where the offender has access to resources to commit and conceal financial crime.

The typical profile of a white-collar criminal includes the following attributes (Piquero and Benson, 2004; Pontell et al., 2014; Stadler et al., 2013):

• The person has high social status and considerable influence, enjoying respect and trust, and belongs to the elite in society.

• The elite generally have more knowledge, money and prestige and occupy higher positions than other individuals in the population occupy.

• Privileges and authority by the elite are often not visible or transparent, but known to everybody.

• Elite members are active in business, public administration, politics, congregations and many other sectors in society.

• The elite are a minority that behaves as an authority towards others in the majority.

• The person is often wealthy and does not really need crime income to live a good life.

• The person is typically well educated and connected to important networks of partners and friends.

• The person exploits his or her position to commit financial crime.

• The person does not look at themselves as a criminal, but rather as a community builder who applies personal rules to their own behavior.

• The person may be in a position that makes the police reluctant to initiate a crime investigation.

• The person has access to resources that enable the involvement of top defense attorneys and can behave in court in a manner that creates sympathy among the public, partly because the defendant belongs to the upper class, like the judge, the prosecutor and the attorney.

However, one of the theoretical challenges facing scholars in this growing field of research is to develop an accepted definition of white-collar crime. While the main characteristics are the foundation, such as economic crime committed by a person of respectability and high social status in the course of an occupation, other aspects lack precision (Kang and Thosuwanchot, 2017).

Edwin Sutherland

Edwin Sutherland is one of the most cited criminologists in the history of the criminology research field. Sutherland’s work has inspired and motivated a large number of scholars in the field associated with his work. His ideas influence, challenge and incentivize researchers. Sutherland’s research on white-collar crime is based on his own differential association theory. This learning theory of deviance focuses on how individuals learn to become criminals. Differential association theory assumes that criminal behavior is learned in interaction with other persons.

Sutherland’s (1939, 1949) concept of white-collar crime has been influential for various reasons. First, there is Sutherland’s engagement with criminology’s neglect of the kinds of crime committed by powerful and influential members of the elite in society. Next, there is the extent of damage caused by white-collar crime. Sutherland emphasized the disproportionate extent of harm caused by the crime of the wealthy in comparison to the much researched and popular focus on crime by the poor and the equally disproportionate level of social control responses. Third, there is the focus on organizational offenders, where crime occurs in the course of their occupations. A white-collar criminal is a person who, through the course of their occupation, utilizes their respectability and high social status to perpetrate an offense. Fourth, the construction of the corporation as an offender indicates that organizations can also be held accountable for misconduct and crime. Finally, there is the ability to theorize the deviant behaviors of elite members. Many researchers have been inspired by Sutherland’s groundbreaking criticism of mainstream criminology as neglecting the crime of the upper class and focusing attention on the crime of the poor. This was a major insight that began a dramatic shift and broadening in the subject matter of criminology that continues today.

Sutherland’s long-lasting influence on criminological, sociological and more recently also on management thinking is observable across the globe, but in particular in the United States and Europe. Sutherland exposed crime by people who were thought of as almost superior, people who apparently did not need to offend as a means of survival. Businesspersons and professionals frequently commit serious wrongdoing and harm with little fear of facing criminal justice scrutiny. It may be true that poverty and powerlessness are a cause of one kind of crime while excessive power can be a cause of another kind of crime.

Sutherland exemplified the corporation as an offender in the case of war crime, when corporations profit massively by abusing the state of national emergency during times of war. Corporate form and its characteristics as a profit-maximizing entity shape war profiteering. It is powerful organizations that may commit environmental crime, war profiteering, state-corporate crime and human rights violations.

While Sutherland’s concept of white-collar crime has enlightened sociologists, criminologists and management researchers, the concept may have confused attorneys, judges and lawmakers. In most jurisdictions there is no offense labeled white-collar crime. There are offenses such as corruption, embezzlement, tax evasion, fraud and insider trading, but no white-collar crime offense. Sutherland’s contribution to the challenge of concepts such as law and crime can be considered one of the strengths of his work as he showed that laws and legal distinctions are politically and socially produced in very specific ways. For lawmakers there is nothing intrinsic to the character of white-collar offenses that makes them somehow different from other types of offense.

One reason for this confusion is that white-collar crime in Sutherland’s research is both a crime committed by a specific type of person and a specific type of crime. Later research has indicated, as applied in this book, that white-collar crime is not a specific type of crime, it is only a crime committed by a specific type of person. However, white-collar crime may indeed emerge some time in the future as a kind of crime suitable for law enforcement, as Sutherland envisaged in his offender-based approach to crime, focusing on characteristics of the individual offender to determine the categorization of the type of crime.

Sutherland’s broader engagement with criminological and sociological theory in general, such as his theory of differential association and social learning, has been and remains influential. One aspect of the theory of differential association – social disorganization – has had a significant influence on later researchers.

Sutherland’s work is the foundation of all teaching, research and policing of white-collar crime today.

Offense characteristics

White-collar crime is illegal acts that violate responsibility or public trust for personal or organizational gain. It is an act or a series of acts committed by non-physical means and by concealment to obtain money or property or to obtain business or personal advantage (Leasure and Zhang, 2017).

White-collar crime is a unique area of criminology due to its atypical association with societal influence compared to other types of criminal offenses. White-collar crime is defined by its relationship to status, opportunity and access. This is the offender-based perspective. In contrast, offense-based approaches to white-collar crime emphasize the actions and nature of the illegal act as the defining agent. In their comparison of the two approaches, Benson and Simpson (2015) discuss how offender-based definitions emphasize societal characteristics such as high social status, power and respectability of the actor. Because status is not included in the definition of offense-based approaches and status is free to vary independently from the definition in most legislation, an offense-based approach allows measures of status to become external explanatory variables.

Benson and Simpson (2015) approach white-collar crime utilizing the opportunity perspective. They stress the idea that individuals with more opportunities to offend, with access to resources to offend and who hold organizational positions of power are more likely to commit white-collar crime. Opportunities for crime are shaped and distributed according to the nature of economic and productive activities of various business and government sectors within society.

Benson and Simpson (2015) do not limit their opportunity perspective to activities in organizations. However, they emphasize that opportunities are normally greater in an organizational context. Convenience theory, however, assumes that crime committed in an organizational context is to be called white-collar crime. This is in line with Sutherland’s (1939, 1949) original work, where he emphasized profession and position as key characteristics of offenders.

Offender characteristics

The white-collar offender is a person of respectability and high social status who commits financial crime in the course of his or her occupation (Leasure and Zhang, 2017). In the offender-based perspective, white-collar criminals tend to possess many characteristics consistent with expectations of high status in society. There is both attained status and ascribed status among white-collar offenders. Attained status refers to status that is accrued over time and with some degree of effort, such as education and income. Ascribed status refers to status that does not require any specific action or merit but rather is based on more physically observable characteristics, such as race, age and gender.

The main offender characteristics remain privilege and upper class. Early perception studies suggest that the public think that white-collar crime is not as serious as other forms of crime. Most people think that street criminals should receive harsher punishments. One explanation for this view is self-interest (Dearden, 2017: 311):

Closely tied to rational choice, self-interest suggests that people have views that selfishly affect themselves. Significant scholarly research has been devoted to self-interest-based views. In laboratory conditions, people often favor redistribution taxes when they would benefit from such a tax. This self-interest extends into non-experimental settings as well. For example, smokers often view increasing smoking taxes less favorably than non-smokers do.

In this line of thinking, people may be more concerned about burglary and physical violence that may hurt them. They may be less concerned about white-collar crime that does not affect them directly. Maybe those who are financially concerned with their own economic well-being will be more concerned with white-collar crime (Dearden, 2017).

White-collar perpetrators have social power associated with different occupational activities across society. Power and authority in the hands of individuals enable white-collar crime. The power essentially comes from the positions individuals legitimately occupy.

Gender perspectives

Research has suggested a relationship between gender and tax compliance, with men being more likely to commit tax offenses than women. Research on tax evasion has both an offender-based perspective and an offense-based perspective. Wealthy individuals have more opportunities to avoid tax compliance and to benefit more heavily from it. In addition, lack of tax compliance can be organized in a professional setting, where the business enterprise manipulates accounting for the purpose of tax evasion. Status affects the ability of individuals to avoid detection or sanctions for non-compliance and the opportunity to commit a variety of tax offenses are status based. Tax compliance can be the result of interaction between authority and expectations, where both authority and expectations are based on individual status.

The offense-based approach to defining white-collar crime is also fitting when examining tax offenses. The actions of being non-compliant dictate that the offense itself is considered a crime.

A special kind of tax offense is bank deposits in tax havens. As documented by Andersen et al. (2017: 2), banks help politicians and others transform petroleum rents and other assets into hidden wealth by bank deposits in tax havens:

Political elites abuse public office to extract rents. Even moderate levels of political rents may have socially undesirable effects, through the adverse selection of political candidates and by distorting political incentives. In countries without strong democratic governance, political rents can be substantial and the economic and political consequences severe.

When white-collar offenders are brought to justice, Supernor (2017: 148) found that “a lot more women were given community service than men” because “women are considered homemakers for families, and the court systems do not want to punish a woman in a way that would take her away from her family”.

Occupational and business crime

A distinction in white-collar offenses can be made between occupational crime and business crime. Occupational crime is committed by persons in an organizational setting for purely personal gain and to the detriment of the organization. Business crime is committed by or on behalf of the organization for profit or enhancement (Kang and Thosuwanchot, 2017). Of course, in business crime organizations cannot commit illegal acts independently of human agents.

Occupational crime is typically committed under conditions of low levels of socialization and weak accountability. Employees may be unfamiliar with organizational goals, or simply ignore them, while at the same time making efforts to achieve personal goals due to weak restraints by the accountability system. The presence of occupational crime may be symptomatic of larger failures in an organization’s system since an organization without committed and accountable employees suggests a higher likelihood of failing in the end. Occupational crime tends to be committed by privileged individuals who feel no attachment to the organization and who do so for purely personal gain (Kang and Thosuwanchot, 2017).

Business crime, on the other hand, is typically committed under conditions of high levels of socialization and strong accountability. Employees identify with not only the organization but also its goals. The pursuit of organizational goals over individual goals does not imply the absence of crime. Rather, achievement of organizational goals becomes so important that if it cannot be done in legal ways, dedicated employees do it in illegal ways (Kang and Thosuwanchot, 2017).

Both occupational and business crime are committed within the organizational context. Corporate crime is committed for business advantage. Examples of corporate crime include cartels and corruption. Illegal price fixing and market sharing occur in cartels to enable participants in cartels to achieve more profits. Bribes are offered to potential customers, allies and public officials to enable contracts and licenses (Leasure and Zhang, 2017).

Convicted white-collar criminals

It is often argued that convicted white-collar criminals have a hard time in prison. They have to leave all their privileges and opportunities behind to join a community dominated by street crime inmates. The argument is formulated in the special sensitivity hypothesis, which suggests a relati...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Introduction
• 1 White-collar crime research
• 2 Theory of convenience
• 3 Convenience research
• 4 Crime signal detection
• 5 Investigation reports
• 6 Crime investigations in Norway
• 7 Misconduct investigations in Scandinavia
• 8 Crime investigations in the United States
• 9 Misconduct investigations in the United States
• Conclusion
• Bibliography
• Index