Crime and Corruption in Organizations

Why It Occurs and What To Do About It

Ronald J. Burke, Edward C. Tomlinson

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317158011
• Edition: 1
• Topic: Law
• Subtopic: Corporate Law
• Index: Law

Although increasing attention has been paid to it, there are no signs that crime and corruption in organizations is decreasing, so if you're a manager or government policy maker, and your mandate is to reduce crime and corruption, where do you start? The international authors of this book fill a critical need to address such a prevalent and costly topic with a detailed analysis of the risks associated with crime and corruption in organizations. They examine the causes and consequences, and the choices we face in our efforts to eradicate these social maladies. They focus on the risks to individuals and organizations surrounding criminal and corrupt acts, with an emphasis on the psychological, behavioral and organizational factors supporting such behaviors. Finally, they explore the phenomenon of crime and corruption across a diverse array of organizational settings (ranging from public to private, for-profit to non-profit) and occupational categories (e.g., police officers, physicians, accountants, and academicians). The constant barrage of scandals publicized by the media demands 'front burner' attention dedicated to stemming this tide. Accordingly, this book turns to prominent researchers employing their talents to produce more ethical organizations. The result is the most up-to-date thinking on both classic (e.g., cognitive moral development) and novel (e.g., moral attentiveness) approaches to crime and corruption, as well as scientifically-grounded approaches to reducing illicit behavior in organizations.

PART I
Introduction

1
Crime and Corruption in Organizations1

Ronald J. Burke

This chapter serves as an introduction to understanding the causes and consequences of crime and corruption in organizations, and suggests what individuals, organizations, and societies can do to reduce corruption. It identifies central concepts and themes in this area and ends with a summary of the chapters that follow.

Ashforth et al. (2007, p. 671) define corruption as “the illicit use of one’s position or power for perceived personal or collective gain.” Corruption includes terms such as corporate wrongdoing, management fraud, and illegal corporate behavior (Zahra, Priem, and Rasheed, 2005). Examples include embezzlement, insider trading, the padding of one’s expenses, paying a bribe to get a contract, altering a financial document, and individuals receiving money or being promoted for altering a financial document. Consider the following. Intel Corp., the giant manufacturer of computer chips, is now facing new antitrust charges alleging that it threatened other computer manufacturers and paid billions of dollars in kickbacks to stop them from using a competitor’s chips (Diaz, 2009). Intel has already paid a US$1.45 billion fine to settle antitrust charges in Europe. The company controls 80 percent of the market, and its practices were stated as harming consumers, other companies and levels of government (Associated Press, 2009a).

In another example, JP Morgan Chase & Co. agreed to pay more than US$700 million to settle charges that it made unlawful payments to friends of public officials to win municipal bond business. As is often the case, the company neither admitted nor denied any wrongdoing (Gordon, 2009).

In December 2009 the US Securities and Exchange Commission (SEC) charged three former executives of now-bankrupt lender New Century Financial Corp. with fraud for misleading investors by misrepresenting their financial circumstances (US Securities and Exchange Commission, 2009).

Finally, the top pasta-makers in Italy were charged with price-fixing. Twenty-six Italian pasta-makers, working as a cartel, were convicted in February 2009 of raising prices to consumers by as much as 36 percent and were fined €12.5 million for restricting competition (BBC News, 2009a).

How Common is Crime and Corruption?

The 2009 PricewaterhouseCoopers Global Economic Crime Survey found that 83 percent of economic crime in 2008 stemmed from “asset misappropriation” or, in plain language, stealing from work—a crime admitted to by 56 percent of men and 76 percent of women responding to the survey. The most common items stolen were office supplies and electronics.

The Association of Certified Fraud Examiners (2009) noted that 55.4 percent of certified fraud examiners believed that corporate fraud had risen during 2008–2009 due to the financial meltdown; 49.1 percent blamed financial pressures for the increase, and 88 percent believed that fraud would continue to increase during 2010. Embezzlement—fraud perpetrated by company employees—increased most strongly during the economic downturn. Ryan (2009), in an interview with Martin Kenney, quoted Kenney as saying that, in his estimate, white-collar theft had grown to US$1 billion per month between 2006 and 2009.

A survey by Sales and Marketing Management Magazine found that 49 percent of sales managers admitted that their sales representatives lied on sales calls, 34 percent admitted to having heard sales reps make unrealistic promises to customers, and 30 percent admitted that they had customers who demanded kickbacks for buying products or services (Bucaro, 2006).

One can also make a distinction between illegal and unethical behaviors. Illegal behaviors would include stealing, and unethical behaviors would include giving clients small gifts at Christmas. Some behaviors, such as bribery, are both illegal and unethical. Turning to employee theft, defined as the “unauthorized appropriation of company property by employees either for one’s own use or for sale to another” (Greenberg, 1995, p. 154), there is evidence that this type of crime has increased during the current economic downturn. In February 2010 Sergey Aleynikov, a former computer programmer with Goldman Sachs, was indicted on charges of stealing computer codes for high-frequency trading software worth millions of dollars to the bank (Bray and Bunge, 2010). He faces the prospect of a possible 25-year prison term. Intellectual property, as well as more tangible things such as merchandise, can be stolen.

The US National Retail Foundation (2009) reported that shoplifting, termed retail shrinkage, rose only 0.08 percent in 2008, but this amounted to US$1.7 billion more in losses year-over-year. Total shrinkage in 2008 was US$36.5 billion, with three-quarters of retailers saying that the problem is getting worse. Employees account for more theft and fraud than do customers or clients: 43 percent versus 36 percent of unexplained losses. Employees fail to ring up sales to friends, or falsely ring up sales returns and put this money on to gift cards. In a strange twist, a British priest, Father Tim Jones of St Lawrence and St Hilda parishes in York, told his congregation that shoplifting was acceptable behavior by those in need when they were desperate, but only from large organizations which would pass this loss on to other consumers in the form of higher prices (Aitchison, 2009). Recent estimates place the annual cost to US organizations from fraud and theft at US$994 billion (ACFE, 2008). Crime and corruption are major problems in organizations.

People sometimes lie on their income tax forms, not declaring all of their income if there is no chance of being caught. Thus, waiters and waitresses at restaurants sometimes do not declare all their tips. Another poll of Canadians, conducted in April 2009, reported that 19 percent of females and 29 percent of males said they would lie in response to the question “Would you lie (leave information off your tax return or make write-offs you couldn’t back up) if you knew you wouldn’t get caught?” As an example, Bernard Kerik, former New York City Police Commissioner, admitted that he lied to the White House while being considered for the position of Homeland Security Chief in 2004. Kerik, a hero following 9/11, admitted eight crimes in all, including lying on tax returns and accepting US$250,000 worth of home renovations as a payback from a company to which he had awarded a public contract. He was eventually sentenced to four years’ imprisonment (Bone, 2010).

• This fact is reflected in The Insider, a paper run by undergraduate business students at my university. Several issues in 2009–2010 each carried a story under the heading “Criminal of the month.” The criminal profiled in October 2009 was John Rigas, currently in prison and formerly CEO of Adelphia. The Rigas family (two sons also worked in the company) was charged with personally misusing US$100 million of corporate funds and hiding US$2.3 billion of debt from investors. John Rigas spent US$12 million on building a personal golf course and US$26 million on buying the timberland around his house to preserve the view. Other expenditures included US$6,000 on shipping Christmas trees to his daughter’s house in New York and buying 17 company cars. The November “criminal of the month” was Sir Allen Stanford who was charged with, and later imprisoned for, a US$7 billion swindle, money-laundering, and a total of 21 criminal charges. The December “criminal of the month” was Richard Scrushy, former CEO of HealthSouth Corporation, who is currently in prison for accounting fraud.

Almost 10 million Americans were victims of identity theft in 2008 according to Miller-McCune.com (Beale, 2009). The methods used ranged from high-tech hacking to stealing wallets and documents.

The Spread of Corruption Within an Organization

Although corruption generally begins with one individual, it typically spreads to other participants (Zyglidopoulos and Fleming, 2008, 2009). Anand, Ashforth, and Joshi (2005) identified six rationalizations individuals used to justify their corrupt actions to themselves, while also reducing regrets and guilt feelings arising from their corrupt behavior. These were: denial of responsibility, denial of injury, denial of victim, social weighting, appeal to higher loyalties, and balancing the ledger. They also proposed three socialization processes that lead people into participating in corrupt acts: cooptation, incrementalism, and compromise. Finally, they identified some external facilitating factors supporting an individual’s participation in corrupt acts: group attractiveness and a social cocoon, the mutual support of rationalization and socialization, and the use of euphemistic language.

In a series of experiments, Gino, Ayal, and Ariely (2009) show that unethical behavior by individuals depends less on their simple calculation of cost-benefit analyses than on the social norms reflected in the dishonesty of others and on the visibility of that dishonesty.

Bernard Madoff did not act alone. His key lieutenant, Frank DiPascali, was found guilty of participating in the fraud and sentenced. Two of his computer specialists have also recently been charged with knowingly producing false financial statements. And another half-dozen employees and family members are also being investigated. Madoff’s two sons, his brother, and a niece were also sued in September 2009 to recover US$198 million for defrauded investors (Clark, 2009).

Sir Allen Stanford also did not act alone. James Davis, CFO of Stanford Financial Group Co. pleaded guilty to helping Stanford in his US$7 billion Ponzi scheme2 (Daker, 2009). Three other executives at his companies were also charged, and the CEO of Antigua’s Financial Services Regulatory Commission was indicted for taking bribes from Stanford to stop investigations.

Edward Okun, convicted of a massive fraud and sentenced to jail for 100 years, was also joined in his schemes by his lawyer, members of his former law firm, and Wachovia Corp. in their work for Okun’s firm, 1031 Tax Group LLC (Larson, 2009).

Corruption is likely to spread or exist if managers and co-workers observe unethical behavior but ignore it. Managers and colleagues are more likely to ignore unethical behavior when they perceive that it might cause them harm (Gino, Moore, and Bazerman 2008a, 2008b).

Gino and Bazerman (2009) found, in a series of laboratory experiments, that individuals were more likely to accept another’s unethical behavior when this unethical behavior increased only gradually rather than dramatically—a “slippery slope effect.”

Financial Fraud

Obviously most fraud involves money.

In October 2009 US investigators charged six securities professionals with insider trading involving hedge funds. One of those charged, Raj Rajaratnam, the founder of the Galleon Group and manager of its hedge funds, is one of America’s richest men. The investigation was triggered by increases in stock purchase just before an announcement of a company takeover. Investigators said that these individuals gained about US$25 million by investing on the basis of tips from a hedge fund credit rating firm and staff at other companies (Associated Press, 2009b). A few weeks later, the number of individuals charged had risen to 20, including lawyers and Wall Street professionals (Reuters, 2009a). Anil Kumar, a former McKinsey director, pleaded guilty to providing inside information to the Galleon Group. Others have pleaded guilty as well, and have agreed to testify against Rajaratnam (Glovin, 2010).

After a long battle against extradition from Canada, Rakesh Saxena, former treasury advisor to the Bangkok Bank of Commerce, whose failure contributed to the Asian financial crisis in 1997, was charged with embezzling Bt140 million. In addition, he has been charged with approving fraudulent loans worth Bt1.65 million from the bank to a company which he owned (Bangkok Post, 2010).

Optionable, Inc., a New York brokerage firm at the center of a US$853 million commodities trading scandal in September 2009, was alleged to have given two former Bank of Montreal (BMO) employees lavish gifts, including gambling trips, meals, tickets, and expensive car and limousine services. BMO was also duped into paying the two men US$23 million in compensation and bonuses, and Optionable millions of dollars in fees and commissions (Trichur, 2009).

BAE Systems Plc, Europe’s largest defense contractor, agreed to pay US$450 million to the UK and the US after pleading guilty to making false statements about deals with other countries (Reuters, 2010a).

In February 2010 Bank of America reached a US$150 million settlement with the US SEC, averting a lawsuit alleging that the bank concealed its knowledge of losses at Merrill Lynch before Bank of America obtained funds from the US government (Reuters, 2010b). Ken Lewis, then CEO of Bank of America, was twice named Banker of the Year by American Banker before his current fall from grace.

The reputations of executives in the financial services sector have taken a huge blow. Yet, apparently some bankers have “thin skins.” In December 2009 Hugh McGee, a Wall Street banker earning an eight-figure salary, wrote a letter to the board of trustees of his son’s private school asking that a teacher and two other staff members be fired. Why? The teacher apparently referred to bankers as “sleazeballs” (Quinn, 2009).

Thousands of individuals hide money in offshore accounts so they can avoid paying income taxes to their home countries. The US government estimates that it loses about US$100 billion per year in tax revenue because of money being hidden in offshore banks and other tax evasion schemes. Pressure on Switzerland, among other countries, has resulted in these countries providing information to the US on such individuals, who have been offered one year—ending in 2010—to make full disclosure of these assets or risk criminal charges.

In 2009 almost 7,000 Canadian tax cheats, holding Can$1.66 billion in hidden assets, voluntarily came forward to disclose these assets and offshore accounts to the Canada Revenue Agency after Canadian tax officials met with the Swiss USB bank to find out about Canadian assets hidden in offshore accounts. These individuals will only have to pay taxes and accrued interest on these monies and no other financial penalty. Canada does not have as strong laws against tax evasion as do other countries (Wednesday-Night.com, 2009). It is also alleged that the staff of Canada’s largest brokerage firm, RBC Dominion, helped clients hide wealth in Liechtenstein (McArthur, 2009).

IF IT’S TOO GOOD TO BE TRUE, IT ISN’T

In November 2009 the SEC charged four people and two companies with organizing a US$30 million Ponzi scheme targeting elderly investors and those approaching retirement. Individuals were encouraged to liquidate the equity on their homes and their retirement funds with the promise of 17 percent to “hundreds of percent” annual return on their investment (Stempel, 2009). In June 2009 Weizhen Tang, a Toronto resident who proclaimed himself as the “Chinese Warren Buffet,” was charged by the US SEC with running a multimillion-dollar Ponzi scheme. According to the Ontario Securities Commission, which is ...