What Is White-Collar Crime?
White-collar crime is a nonviolent crime often characterized by deceit or concealment to obtain or avoid losing money or property, or to gain a personal or business advantage.
Examples of white-collar crimes include securities fraud, embezzlement, corporate fraud, and money laundering. Entities that investigate white-collar crime include the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD), the Federal Bureau of Investigation (FBI), and state authorities.
- White-collar crime is a nonviolent crime of deceit or concealment to obtain or avoid losing money or to gain a personal or business advantage.
- Securities fraud, embezzlement, corporate fraud, and money laundering are white-collar crimes.
- The Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD), the Federal Bureau of Investigation (FBI), and state authorities investigate white-collar crime.
Understanding White-Collar Crime
"White-collar crime" is a term first coined by sociologist Edwin Sutherland in 1949 who defined it as a crime committed by a person of respectability and high social status during his occupation. White-collar workers historically held non-laboring office positions while blue-collar workers traditionally wore blue shirts and worked in plants, mills, and factories.
High-profile individuals convicted of white-collar crimes include Ivan Boesky, Bernard Ebbers, Michael Milken, and Bernie Madoff. Their crimes have included insider trading, accounting scandals, securities fraud, and Ponzi schemes.
Rampant new white-collar crimes facilitated by the internet include so-called Nigerian scams, in which fraudulent emails request help in forwarding a substantial amount of money to a criminal ring. Other common white-collar crimes include insurance fraud and identity theft.
The Madoff Victim Fund (MVF) distributed over $3.7 billion to nearly 40,000 victims worldwide in connection with the Bernard L. Madoff Investment Securities LLC (BLMIS) fraud scheme.
The FBI cites large-scale corporate fraud perpetrated by many throughout a corporate or government institution, among its highest enforcement priorities. This type of crime incurs a significant financial loss to investors and can damage the U.S. economy and investor confidence.
Corporate fraud gathers the widest group of partners for investigations, including the FBI, the U.S. Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Financial Industry Regulatory Authority, Internal Revenue Service, Department of Labor, Federal Energy Regulatory Commission, and the U.S. Postal Inspection Service.
Falsification of Financial Information
The majority of corporate fraud cases involve accounting schemes that are conceived to deceive investors, auditors, and analysts about the true financial condition of a corporation or business by manipulating financial data, share price, or other measurements to inflate the financial performance of the business.
In 2014, Credit Suisse pleaded guilty to helping U.S. citizens avoid taxes by hiding income from the Internal Revenue Service and paid penalties of $2.6 billion. Bank of America sold billions in mortgage-backed securities (MBS) tied to properties with inflated values without proper collateral and agreed to pay $16.65 billion in damages.
Self-dealing occurs when a fiduciary acts in their own best interest rather than in the best interest of their clients. Considered a conflict of interest, this illegal activity can lead to litigation, penalties, and termination of employment for those who commit it.
Self-dealing includes front-running, when a broker enters into a trade with the foreknowledge of a non-publicized transaction that will influence the price of the asset, resulting in a financial gain for the broker. It also occurs when a broker or analyst buys or sells shares for their account ahead of their firm's buy or sell recommendation to its clients.
Insider trading occurs when individuals act upon or divulge to others information that is not yet public and is likely to affect share price and company valuations once it is known. Insider trading provides an unfair advantage for individuals to profit and does not matter how the material nonpublic information was received or if the person is employed by the company.
Money laundering is accepting cash earned from illicit activities, such as drug trafficking, and making the cash appear as earnings from legal business activity. Criminals often filter money from crimes such as human and narcotics trafficking, public corruption, and terrorism in a three-step process:
• Placement is the initial entry of a criminal’s financial proceeds into the financial system.
• Layering separates the criminal’s financial proceeds from their source and creates a deliberately complex audit trail through a series of financial transactions.
• Integration occurs when the criminal’s financial proceeds are returned to the criminal after "laundering" from what appear to be legitimate sources.
A cash-based business, such as a restaurant that is owned by a criminal organization, is a common tool to launder illegal money. Daily cash receipts may be inflated to funnel illegal cash through the restaurant and into the bank for distribution to the owners.
Anti-Money Laundering Act of 2020
The Anti-Money Laundering Act of 2020 assists financial institutions in their efforts to meet their obligations under laws and regulations designed to combat money laundering by targeting foreign and domestic terrorist financing, transnational criminal organizations, drug trafficking organization activity, human trafficking, and human smuggling, and proliferation financing.
Securities and Commodities Fraud
• High-yield investment fraud involves promises of high rates of return coupled with claims of little or no risk in investments like commodities, securities, and real estate.
• Advance fee schemes involve fraudsters convincing their targets to advance small amounts of money with a promise to deliver greater returns.
• Broker embezzlement schemes involve illicit and unauthorized actions by brokers to steal directly from their clients, usually with a myriad of false documents.
• “Pump and dump” schemes artificially inflate the price of lower-volume stocks on small over-the-counter markets. "The 'pump' involves recruiting unwitting investors through false or deceptive sales practices, public information, or corporate filings. Once the target price is achieved, the perpetrators “dump” their shares at a huge profit and leave innocent investors to foot the bill.
• Late-day trading is the illegal practice of recording trades that are executed after hours as having occurred before a mutual fund calculated its daily net asset value (NAV). Late-day trading can dilute the value of a mutual fund's shares and harm long-term investors.
What Are Well Known Securities Fraud Cases Investigated by the FBI?
What Are the Penalties for White-Collar Crime?
If convicted, an individual may be sentenced to time in county jail, state prison, or federal prison, depending on the severity of the crime. Additionally, fines may be imposed as well as required restitution to the victim.
Who Investigates Securities Fraud?
Allegations of securities fraud are investigated by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), often in concert with the FBI.
State authorities can also investigate investment scams. In a unique attempt to protect its citizens, the state of Utah established the nation’s first online registry for white-collar criminals where photos of individuals who are convicted of a fraud-related felony rated as second-degree or higher are featured on the registry.
What Are Anti-Money Laundering Rules Used in Banking?
Many companies, especially those involved in finance and banking, have anti-money laundering (AML) rules in place to detect and prevent money laundering. For banks, compliance starts with verifying the identity of new clients, a process sometimes called Know Your Client (KYC) and customer due diligence detects money laundering strategies like breaking up large money laundering transactions into smaller ones to evade reporting limits and avoid scrutiny.
What Is Intellectual Property Theft?
Intellectual property theft is a white-collar crime which robs people or companies of their ideas, inventions, and creative expressions, known as intellectual property, and may include trade secrets and proprietary products or movies, music, and software.
The Bottom Line
Securities fraud, embezzlement, corporate fraud, and money laundering are considered white-collar crimes, perpetrated traditionally by those in corporate or office settings. The SEC, NASD, the FBI, and state authorities work in concert to investigate white-collar crimes which are often prosecuted at the federal level. Penalties for committing a white-collar crime include prison, fines, and restitution.