By Nicholas M. Wooldridge, Esq.
In 1939, sociologist Edwin Sutherland defined financially motivated, non-violent crime committed by businesses and government professionals broadly with the term “white-collar crime.” White-collar crime includes fraud, bribery, Ponzi schemes, insider trading, embezzlement, money laundering, various forms of theft including cybercrime and identity theft, money laundering and forgery. According to the Federal Bureau of Investigation (“FBI”) these crimes cost the U.S. $300 billion annually and some of these losses are sustained by small businesses.
In the wake of the 2008 financial crisis, amid calls from democratic presidential candidates for heads-to-roll on Wall Street, the number of prosecutions ticked up, but then precipitously dropped. A recent report by Syracuse University, which obtained data from the Department of Justice and the Executive Office of United States Attorney, shows that the projected number of prosecutions this year is 12 percent less than last year and 29 percent less than five years ago.
The Syracuse Report further notes that federal prosecution of white-collar crime has hit a 20-year low this year, as tracked in this chart which accompanied the Syracuse study.
What does this mean for small business lenders?
First, the decline in federal white-collar crime prosecutions does not necessarily indicate there has been a decline in white-collar crime. The decline in prosecutions could be due at least in part to shifting enforcement policies by each of the administrations and the various agencies, the changing availabilities of essential staff and congressionally mandated alterations in the laws. Thus, lenders, individuals and small business must stay vigilant in their anti-fraud and compliance efforts. Second, will the decline in white-collar prosecutions open Pandora’s box and lead to increased offending by white-collar criminals? What about the losses for small businesses and lenders caused by fraud?
Fraud in its many forms costs small businesses, lenders and individuals hundreds of billions of dollars per year and these are likely to stay on a one way trajectory of growth
upwards–more complicated, more sophisticated and with increasing losses to all. Indeed, after each high-profile criminal prosecution ends with a stiff sentence and prosecutors announce that a message has been sent to would be criminals—think Bernard Madoff and his 150 year prison sentence—another Ponzi scheme is uncovered. Only a few short months after Madoff’s arrest, R. Allen Stanford’s $8 billion phony bank certificate of deposit empire came crashing down and he was sentenced to 110 years imprisonment.
The same is true with other types of fraud – bank fraud, bankruptcy fraud, embezzlement, healthcare fraud, mail fraud, wire fraud, and tax fraud. Fortunately, however, decades of research have shown that increased criminal prosecution of white-collar offenders and stiffer sentences has played a very small role in deterring future white-collar offenders.
Rather, most scholarly research has found that prevention through a known risk-of-detection by potential fraudsters has had a far greater influence on potential criminal behavior. Here is an illustrative example: prior to the introduction of digital cameras in banks, bank robbery was hard to detect and commonplace. With the introduction of digital cameras and alarms, the number of bank robberies has gone down.
As for losses for small businesses and lenders, Benjamin Franklin’s axiom “an ounce of prevention is worth a pound of cure” is true today as it was when Franklin made the quote. While almost all fraudsters, once convicted, are required to pay restitution per the Mandatory Victims Restitution Act, which converts the criminal judgment into a civil judgment effective for twenty (20) years on a criminal defendant’s property. However, the recovery of restitution awards by the U.S. Department of Justice have been paltry –just 3.5% in 2009. This is because by the time most criminal defendants are sentenced, they are indigent, and once released, as convicted criminals, their earning power decreases and their ability to make any future restitution payments is minimal at best.
While the decrease in the number of prosecution of white-collar crimes seems worrying at first, it’s not the end of the world. All small businesses and lenders have a bevy of civil remedies to collect and obtain judgments, all of which require a lesser burden of proof (i.e. “preponderance of the evidence” compared to “beyond a reasonable doubt”). Indeed, the DOJ uses civil remedies to enforce restitution orders when attempting to collection restitution because criminal restitution orders have the effect of a civil judgment.
Yet, in contrast to criminal convictions and restitution orders, the pursuit of civil remedies as the primary tool for recovery efforts provides incremental leverage to victims: the individual responsible for the losses can still work, a majority of their assets can be seized or frozen through prejudgment remedies, and there can be an increased chance of collection.
Finally, if you are the risk manager in your company reading this, just remember one line–prevention means proactive steps to continuously monitor, train and update your compliance, corporate ethics, and fraud prevention programs regularly, not just quarterly or once a year.
Further, while certain litigation, such as section 404 of Sarbanes Oxley requires that most public companies have adequate internal controls to detect fraud and avoid material misrepresentations in their financial statements, a comprehensive fraud prevention and compliance program is needed to avoid even the smallest losses, because a loss here and a loss there can quickly add up. In sum, whether white-collar prosecutions increase or decrease in any given year or decade, one thing is for certain: white-collar crime and especially fraud is becoming increasingly complex and sophisticated, thus, small businesses and lenders have to stay ahead of the curve and redouble their efforts on prevention.
About Attorney Nicholas M. Wooldridge
Mr. Wooldridge has a wealth of experience representing individuals and corporations, both U.S. and international, in all areas of defense work, including internal investigations, federal and state investigations, trial, grand jury practice, and appeal. He is dedicated to representing and counseling clients aggressively and effectively at every stage of a criminal or regulatory proceeding including investigation, indictment or complaint, plea negotiations, trial, sentencing and any necessary appeals.
Disclaimer: The information presented in this article is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.