The term white collar crime was first used in 1939 during an address delivered by Professor Edwin Sutherland of Indiana University to the American Sociological Society. Sutherland sought to expand the definition of crime beyond the generally held belief that crime was an activity, often violent, perpetrated by members of the socio-economic under class. Sutherland felt that viewing crime from this old perspective ignored the fact that "persons of the upper socio-economic class engage in much criminal behavior; that this behavior differs from the criminal behavior of the lower socio-economic classes principally in the administrative procedures used in dealing with the offenders," (see Rosoff). American business history is, of course, replete with violations of law by the so called "robber barons" and "captains of industry." White collar crime was used metaphorically by Sutherland to differentiate between crimes committed by people working in office buildings and crimes committed by those who were either unemployed or occupied in the "blue collar" trades. To Sutherland, a white collar crime was a crime "committed by a person of respectability and high social status in the course of his occupation." Sutherland thus sought to connect the social status of the white collar criminal with the "occupational mechanism" by which his or her crime is committed.
White collar crime has come to be a generic term for a broad and ever expanding range of non-violent criminal activity including but not limited to: embezzlement, bribery, money laundering, illegal lobbying activities, consumer fraud, price fixing, income tax fraud, and computer "hacking" or computer breakins. Because white collar crimes are so varied, it is difficult to come up with hard data on both the number of white collar crimes committed in the United States each year and the dollar amount involved. Governmental agencies such as the U.S. Justice Department, for instance, do not have a data category that collectively encompasses all offenses generally considered to constitute white collar crime.
Nevertheless various organizations often attempt to arrive at monetary estimates of the problem. The U.S. Department of Commerce, for instance, estimated in 1974 that white collar crime was a $40 billion "industry." By 1996, however, the Association of Certified Fraud Examiners felt that the figure for occupational fraud and abuse—internal fraud—topped $400 billion. That organization's 1996 Report to the Nation on Occupational Fraud and Abuse also estimated that organizations generally lose about six percent of revenue to white collar crime.
White collar crime, although not identified as such until the mid-20th century, is not a recent phenomena. White collar crime has existed in business since the first entrepreneurs opened shop. Cases of fraud date back as far as 360 B.C., when Xenothemis and Hegestratos, two residents of Syracuse, then a Greek colony, conspired to bilk a commodity broker through a deceitful scheme. They asked the unsuspecting broker for an advance on a shipment of corn they claimed was loaded on a vessel owned by Hegestratos. Their intention was to sink the vessel at sea and keep the money for the non-existent corn. Hegestratos, however, when caught by passengers in the act of scuttling the ship, panicked and drowned when he jumped overboard.
In U.S. business history much of what is now considered white collar crime was then considered a normal, if somewhat underhanded, part of doing business. For example, some of the best known "captains of industry" in the late 19th century were known to stretch their business ethics. Among some of the more notorious were Jay Gould, Jim Fiske, Schuyler Colfax (who was Ulysses S. Grant's vice-president), and James Garfield, the 20th president of the United States.
Colfax and Garfield were involved in the infamous Credit Mobilier scandal of the mid-1800s. Credit Mobilier was the construction company for the Union Pacific Railroad. The U.S. government lent the company $16,000 per mile for that part of the railroad built on level ground, $32,000 per mile for track laid on difficult terrain, and $48,000 per mile for rail laid in the mountains. Credit Mobilier charged the Union Pacific huge sums for its services, much of it for work never completed. The major stockholders owned stock in both companies and earned $23,000,000 in profits—much of it government money.
The New York Sun suspected financial corruption in the building of the railroad and revealed such in 1872. The paper discovered that Oak Ames, a member of the Pacific Railroad Committee in the House of Representatives, had "sold" stock in Credit Mobilier to several Congressman, including the future President Garfield and Vice-President Colfax, in an effort to stave off a corruption investigation. Ultimately, however, a senate investigating committee absolved the politicians of any wrongdoing.
Neither were Jay Gould and Jim Fiske saints. In the 1870s they watered stock in the Erie Railroad by printing phony stock certificates, which they then sold to Cornelius Vanderbilt, a railroad magnate who operated the New York Central Railroad—and a man who was no stranger to shady financial dealings. Their manipulation cost Vanderbilt millions of dollars and threw the Erie railroad into bankruptcy in 1875. That was not the first time Fiske and Gould had created havoc in the United States through their financial wheeling and dealing.
In 1869, the pair tried to corner the nation's available gold supply. President Grant had told them the government was not planning to sell gold on the open market. With that "insider information" in hand Fiske and Gould then set out to purchase large amounts of gold, thus driving up the price. Their actions forced business owners who required gold to settle international transactions to sell stocks and bonds and call in debts to gather enough money to purchase gold. Grant reacted quickly and authorized the sale of $4 million of the Treasury's gold supply. Somehow, Fiske and Gould learned of the sale before it occurred. They were amongst the first to sell their gold—and at a tremendous profit. These scandals, however, had no adverse affect on Fiske and Gould, who brought 19th century white collar crime to new heights.
Nearly every decade of the 20th century produced a white collar criminal who made newspaper headlines. The 1920s saw the rise of Charles Ponzi whose name lives on in the term "Ponzi Scheme." Ponzi's firm, the Financial Exchange Company, took pyramid investing to new heights by promising, and delivering to the first few investors, an astounding 50 percent return on their investment in 45 days. Although bilking later investors for over $10 million, Ponzi died a pauper in Brazil, where he ran a hot dog stand, in 1949.
In the 1950s the politically connected Billy Sol Estes parlayed empty and non-existent storage tanks into $175 million by claiming they were full of liquid fertilizer and salad oil. In 1963 he was sentenced to 15 years in a federal prison. Estes is remembered for his quote: "You borrow enough from a banker and you no longer have a creditor.… You get into somebody deep enough, and you've got a partner." The go-go years of the 1980s also saw a number of white collar criminals who made the headlines and became media sensations. In 1981 Barry Minkow, a 16-year-old Los Angeles high school student, borrowed $1,500 to start ZZZZBest, a carpet cleaning company. By 1987 the company's paper value, all based on fraudulent or non-existing assets, was nearly $200 million. Later that year Minkow's mythical holdings collapsed and what was worth $200 million on paper was auctioned off for $62,000. Minkow was convicted on 57 counts of bank, stock, and mail fraud, money laundering, racketeering, conspiracy, and tax evasion, all at 22 years of age. Minkow received a 25-year jail sentence.
The best known white collar criminal of the 1980s is undoubtedly Michael Milken, the "junk bond king" and the ultimate inside trader who, with his cohort in crime Dennis Levine, made $500 million in one year. Milken made Ivan Boesky, another trader whose stock speculations were based on inside information, look like a piker as Boesky only managed to make $50 million in one year from his nefarious deals. All three spent time in federal prison. People like Milken and Boesky often become folk heroes of a sort because their offenses are non-violent and their "victims" are often institutions or ethereal concepts.
White collar crimes are committed by individuals ranging from company clerks to CEOs of multinational corporations as well as people working on their own to rob private citizens. White collar crimes can also be perpetrated by corporations, through the actions of individuals or groups of employees. More often than not, however, corporations are the targets of white collar criminals, rather than the perpetrators of crimes. These crimes can result in monetary losses of a few cents to tens of millions of dollars, depending on their complexity and the expertise and intentions of the perpetrators. They can be committed by employees seeking only to embezzle a "few dollars" to executives siphoning off corporate funds under the guise of outlandish salaries.
According to Michael Gips, senior editor of Security Management, occupational fraud is the most common and rapidly growing type of white collar crime. Occupational fraud refers to an employee using his or her occupation for self-benefit at the expense of the employer. In essence the employer is the victim of the crime as opposed to fraud perpetrated against private citizens by such schemes as credit card fraud, "identity takeover," etc. Included under the heading occupational fraud are such activities as bribery, conflict of interest scenarios, and kickbacks. Owners and equity executives account for only about 12 percent of occupational fraud. More and more occupational fraud, however, is being committed by high-level executives, and although their numbers are small the monetary impact of their crimes is staggering. The Association of Certified Fraud Examiners reported that the median loss due to white collar crimes inflicted on companies by their owners and high level executives is 16 times greater than crimes perpetrated by lower level employees. These high level executives are able to keep fraudulent transactions well hidden because of access to companies' money and books.
Occupational fraud is also growing in the nonprofit sector amongst educational and tax-exempt institutions such as foundations, universities, and also not-for-profit hospitals. Such institutions and organizations are often lax in checking the backgrounds of potential employees and are reluctant to report white collar crime for fear of estranging donors, benefactors, and their reputation in the community.
The rapid growth of computerization has added to the problem of occupational fraud, according to Gips. "Many of the schemes are now conducted with the aid of a computer, where information can more easily be hidden, altered, or deleted." Employee downsizing is also a contributing factor as terminated employees, who easily rationalize their actions, seek revenge on employers. Another result of downsizing is the reduction in security and auditing employees.
Fraud is especially prevalent in financial institutions and takes up about 40 percent of the time and resources of the FBI's financial crime section according to FBI section chief Charles Owen. Owen reports that in 1991 the FBI pursued 7,163 fraud cases in financial institutions but by late 1997 that figure had jumped to 8,300 cases. Much of this rise is due to check and mortgage loan fraud.
The electronic age has also issued in unique opportunities for white collar criminals especially as our society moves more and more towards a cashless society. Electronic transfer fraud is a growing problem as more and more consumers and companies are charging goods and services over the Internet on their credit cards. "Most companies are struggling to develop secure payment methods, such as the Secure Electronic Transaction (SET) system, designed to prevent theft of credit card numbers on the Internet," Gips writes. Other areas of concern are health care fraud, telemarketing fraud, and investment fraud.
It is estimated by the U.S. General Accounting Office that healthcare fraud in 1995 alone tallied up to somewhere between $30 and $100 billion, much of this in the government Medicare program. To combat Medicare fraud the GAO has set up an Internet site entitled FraudNET through which people can report fraud, mismanagement, or other abuses perpetrated by the public and government employees. Telemarketing fraud targets businesses and private citizens, especially the elderly, through a wide variety of fraudulent schemes. A favorite business scam is to bill companies for low priced items that were never ordered in the hopes that a busy accounts payable clerk will issue a check without questioning the invoice.
Security regulators in New York estimate that investment fraud that gets reported cost the American public approximately $6 billion in 1996. By mid1997, however, there was a 25 percent increase in stock market fraud complaints. Much fraudulent activity in the stock market is due to the extraordinary bull market of the 1990s. Surprisingly, stock market fraud is most likely under reported as good economic times generates fewer complaints and fewer investigations. "Usually those frauds are not uncovered until bad economic times, like the S&L crisis in the late eighties," according to Joseph Wells of the Association of Certified Fraud Examiners.
There is a growing effort to combat increasing white-collar crime. Law enforcement agencies are becoming more sophisticated in their approach to the problem as is the FBI. Both are hiring personnel trained in areas such as embezzlement, fraud against the elderly, cellular phone theft, computer crime, and the list of crime specialties continues to grow. The FBI for instance was instrumental in the creation of a subgroup of the Interagency Bank Fraud Working Group, which looks into computer related fraud in financial institutions. Under the Health Insurance Portability and Accountability Act, the FBI received $47 million in 1997 to investigate healthcare fraud. By 2003 funding is expected to reach $114 million to combat the growth of fraud in the healthcare industry. Private agencies such as the already mentioned Association of Certified Fraud Examiners and the National White Collar Crime Center also contribute to fighting white collar crime.
The National White Collar Crime Center, which is part of the Institute for Intergovernmental Research, operated from 1978 to 1992 as part of the Leviticus Project. This undertaking was a multi-state association of law enforcement, prosecution, and regulatory agencies which joined together to fight crime and corruption in the coal and eventually in the oil, natural gas, and precious metals industries. In 1992 the goal was expanded to fight all economic crimes. The Center's mission includes, "providing investigative support services to assist in the fight against economic crime, operating a national training and research institute focusing on economic crime, developing partnerships with public and private agencies to address economic crime issues, and developing the Center as a national resource in combating economic crime." The Center provides services to local and state law enforcement, prosecution, and regulatory agency members in the U.S.
Companies can also develop and enforce measures to combat white collar crime. In writing for Managing Office Technology Donald Bucklin offers the following steps that companies should take to head off white collar crime problems: establish compliance standards and procedures for employees and company representatives; assign specific high-level employees to monitor implementation and compliance of these standards and procedures; communicate these standards and procedures to all employees through training programs, seminars, and the like; do not delegate discretionary authority to crime-prone employees; make use of monitoring and auditing systems and procedures; establish disciplinary mechanisms for standards enforcement; and respond appropriately to detected offenses. Bucklin feels that the above steps, if instituted and enforced, will be a major step in preventing white collar crime—before such a crime is uncovered by an outside organization such as a government regulatory agency. "An effective program can help you conduct internal compliance audits of target activities from the point of view of a prosecutor, and insure that adequate controls exist to prevent white collar criminal activities," Bucklin concludes.
White collar crime will not disappear any time soon. Criminals will continue to devise new and more elaborate schemes to take advantage of ever changing technology in order to bilk their victims. Corporations, law enforcement officials, and others will continue to develop sophisticated measures to detect fraud and apprehend criminals. White collar crime did not begin with Xenothemis and Hegestratos, nor did it end with Michael Milken and Dennis Levine. It has been part of society since the dawn of business and will remain so. However, as more and more people become aware of its detrimental effects on individuals and society as a whole, the efforts to combat it will increase.
[ Arthur G Sharp ,
updated by Michael Knes ]
Bologna, Jack and Paul Shaw. Corporate Crime Investigation. Boston: Butterworth-Heinemann, 1997.
Bucklin, Donald. "Worried That White Collar Crime is Afoot?" Managing Office Technology, June 1997.
Cole, Richard B. Management of Internal Business Investigations: A Survival Guide. Springfield, IL: Charles C. Thomas, Publisher Ltd., 1996.
Gips, Michael A. "Where Has All The Money Gone?" Security Management, February 1998.
National White Collar Crime Center. "National White Collar Crime Center." Tallahassee, FL: Institute For Intergovernmental Research, 1999. Available from: www.iir.com/nwccc/nwccc.htm .
Riddle, Kelly E. "Unbuttoning White Collar Crime." Security Management, January 1999.
Rosoff, Stephen M., Pontell, Henry N., and Robert Tillman. Profit Without Honor: White Collar Crime and the Looting of America. Upper Saddle River, NJ: Prentice Hall, 1998.
Sutherland, Edwin H. White Collar Crime. New York: Holt, Rinehart and Winston, 1961.