Economic Crime

Legislations on White Collar Crime
2010

5/26/2010

Introduction:
In 1939 Edwin H. Sutherland (1893–1950), a sociologist of the symbolic interactionist school, first used the phrase white-collar criminal in a December 27, 1939 speech to the American Sociological Association. In his 1949, he defined white-collar crime as "approximately as a crime committed by a person of respectability and high social status in the course of his occupation."
Fraud is widespread and growing. One conservative estimate indicates that fraud, in all its forms, comes out of more than $40 billion each year. Advancing technology has created more opportunities for fraud. Computer use leaves everyone vulnerable to fraud, including telemarketing fraud, identity theft, and health care scams.
What Is Economic Crime?
Economic Crimes can be defined as the intentional use of deceit to deprive another of money, property or a legal right. Economic crimes fall broadly into the categories of those illegal actions under-taken by perpetrators to make money for themselves or those illegal actions undertaken principally to further the aims of their company or other organizations.

Types and scope of Economic Fraud:
Economic Crimes can be of various types and nature. It varies from individual to organizational level. Most commonly observed in our daily life are as follows: Serial | Crime Type | Brief Description | 1. | Asset Misappropriation | Include the misuse or theft of assets belonging to a company | 2. | Bank Fraud | Act to defraud a bank of funds | 3. | Bribery | Anything of value is offered/accepted with intent to influence decisions/actions of the taker | 4. | IP Infringements | Someone copies or imitate items without any authorization | 5. | Insider Trading | Illegal/inappropriate use of inside confidential information | 6. | Investment Scheme | Unsuspecting victim is contacted by an actor who promises large return on small investment | 7. | Kickback | Paying back a portion of purchase price to buyer | 8. | Money Laundering | Transfer of money from illegal activities whose original source is not traceable or legitimate | 9. | Tax Evasion | Fraud in filing or paying taxes | 10. | Accounting Frauds | Intentional manipulation with the accounts to show high profits or low expense |

Fig 1: Relative Percentage of the Commonly occurring Economic Crimes

Existence of Economic Crime:
Economic Crimes are not a localized phenomenon. Rather it truly has a global occurrence. Incidence of economic crimes varies by territory, some countries mainly those in emerging markets experienced much higher levels of fraud than the average. Global recession has increased the risk of economic crime incidence.
In perspective of the industry sector, some sector (mainly insurance, financial services and communications) reported higher levels of fraud than others. But no organization is immune from this phenomenon.

Fig 2: Economic Crimes reported by sectors

Motives behind an Economic Crime:
There can be various factors which influence a well educated person into crime. Money/profit is the key motive behind the crime, being committed individual level or an organizational level. Also, within an organization when legitimate or conventional avenues make the attainment of a goal difficult or impossible, many of us, whether as individual or as corporate actors, will resort to illegitimate or deviant avenues.
Fraud motive are defined in ‘Fraud Triangle’, which often point to three factors, need of an incentive or pressure to engage in misconduct, opportunity to commit fraud and ability to rationalize or justify their actions.

The Main Players:
Economic Crimes are committed by people at every level and in practically every department. One survey suggests that ‘Figureheads’ within a business are responsible for 25% of all reported frauds.
Most fraudsters tend to be risk-takers, decisive, extroverted, career- or success-oriented individuals. Paradoxically, it is precisely these traits that are also highly prized in management recruitment. Today’s manager needs to possess a high degree of creativity and flexibility, qualities which can be successfully employed both appropriately and inappropriately.
The Victims:
The Government is a major victim of many forms of economic crime, which indirectly affects all citizens. Examples include Tax evasion and frauds by public servants. Organizations may also be a victims of frauds and are particularly vulnerable to offences involving the financial or technical expertise of employees. Investors and savors are also most vulnerable to financial frauds and other offences such as ‘mis-selling’. But it’s the general public which will suffer the most, ultimately.

Some Famous Examples of Economic Crime:

Enron: revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects. Enron's stock price, which hit a high of US$90 per share in mid-2000, caused shareholders to lose nearly $11 billion when it plummeted to less than $1 by the end of November 2001
Adelphia Communications, CEO, Rigas was sentenced to fifteen years in federal prison. Rigas was convicted last July of fraud and conspiracy charges relating to $50 million in cash advances and $252 million more in margin loans.
L. Dennis Kozlowski, the former CEO of Tyco, and Mark Swartz, his main lieutenant. Both of them were convicted by a Manhattan jury just three days earlier on charges relating to the theft of $150 million and the covert sale of stock worth nearly $500 million more. The Tyco convictions (twenty-two counts each) cap a three-year investigation involving two trials, nearly ten months of testimony and several weeks of jury deliberations.
WorldCom CEO Bernard Ebbers, who was convicted of engineering an unprecedented $11 billion fraud.
Satyam Scandal:

Economic Crime & Pakistan:
Pakistan is not an exemption to the horizon of economic crimes. The concept and the term of Economic Crime is, nonetheless comparatively new in Pakistan as compared to other developed countries. But crimes at individual levels (frauds, forgery, banking loans, kickbacks, bribery) are very common. Corporate crime terminology is, however, a new horizon in Pakistan. Not much cases of corporate crimes are so far reported.
Scarcity of reported corporate crimes is not due to honest trading or fair game play. Rather, lack of expertise on the side of investigators and Political influence are main factors for non-reporting of Corporate Crimes.
As the result of growing economy, multi-national culture and globalization impact on Pakistan, there are much more requirements to indigenously cope with the globally increasing trend of Economic Crimes. Preemptive measures are needed to cope with the economic crimes trend rather than planning after it got roots in our economy. Some very familiar Economic Crimes which come up in our recent history are Cooperative scandal, Finance Companies, SME scams, Land Mafia, Housing Schemes, KIA Pride, Taj Company, kickbacks in defence deals.
Legislation in Pakistan:
A lot of efforts have already been put through on legislation in recent past. But still lot of work needs to be done. Legislation is ever evolving process especially for the sectors which are continuously growing and new trends and techniques are continuously applied like the case of Economic Crimes.
Some highlights of the legislative work done in Pakistan are as follows:
Anti Money Laundering Act 2010
The Act mainly applies on different types of currency transactions which exceed amount specified by National Executive Committee. Scope of the Act is on all financial institutions which carry out any of the following activities: * Acceptance of deposits * Lending, financial leasing * Money or value transfer * issuing & managing means of payments * Financial guarantees * Trading in money market, foreign exchange, securities * Share Market, insurance business
As per this ACT, A person shall be guilty of offence of money laundering, if the person:- * acquires, converts, possesses, uses or transfers property, knowing or having reason to believe that such property is proceeds of crime; or * conceals or disguises the true nature, origin, location, disposition, movement or ownership of property, knowing or having reason to believe that such property is proceeds of crime; or * holds or possesses on behalf of any other person any property knowing or having reason to believe that such property is proceeds of crime; or * participates in, associates, conspires to commit, attempts to commit, aids, abets, facilitates, or counsels the commission of the acts specified in clauses (a), (3) and (c).
The Act defines the Punishment for money laundering as on maximum side as rigorous imprisonment for a term one to ten years, can also be liable to fine which may extend to one million rupees and liable to forfeiture of property.
Listed Companies Ordinance, 2002
Title of the Ordinance is ‘Substantial Acquisition of Voting Shares and Take-over’ Ordinance 2002 which is commonly known as Listed Companies Ordinance and Takeovers & Merger Ordinance. Main focus of the Ordinance is setting principals and guidelines for Mergers, voting shares/right and Acquisitions of listed companies.
Some highlights of the Ordinance is as follows:
Shares and voting rights or 10 % or more need to be registered and approved with the regulator SECP.
In the event of withdrawal of public offer, except as provided in ordinance, or contravention of any provision of this Ordinance, the acquirer and any person acting in concert shall stand debarred as acquirers for the next three years.
In case the board of directors or management of the tar get company contravenes any provision of this Ordinance, the directors, the chief executive and the company and secretary, on a finding by the Commission, shall stand disqualified to hold any such office in a listed company for the next two years.
If any person fails to comply with the provisions of this Ordinance, the Commission may, if satisfied, after giving the person an opportunity of being heard, impose penalty which may extend to [fifty]17 million rupees.

Securities & Exchange Commission of Pakistan Act 1997:
Main objective of the Act was establishment of the Securities and Exchange Commission of Pakistan SECP for the beneficial regulation of the capital markets, superintendence and control of corporate entities.
The Commission (SECP) is authorized for: * Regulating issues of securities & Stock Exchange * Registering & regulating stock brokers, bankers to issue, portfolio mangers, investment advisors * Look into fraudulent and unfair trade practices * Conducting investigation * Considering and suggesting reforms in the related laws

Companies Ordinance 1984:
Corporate Sector in Pakistan is governed by the Companies Ordinance 1984. This Ordinance is the basis for working of corporate world and form foundation for all future legislation.
The avowed objective of this Ordinance was inter alia to consolidate and amend the law relating to companies and certain other associations for the purpose of healthy growth of the corporate enterprises, protection of investors and creditors, promotion of investment and development of economy.
Offences Related to Economic Crime:
Other than mentioned above, Economic Crime offences are also tackled through the following statutes: * A number of offences defined under Pakistan Penal Code * Official Secret Act 1923 * Prevention of Corruption Act, 1947 * Foreign Exchange Regulation Act, 1947 * Imports and Export (Control) Act, 1950 * Banking Companies Ordinance, 1962 * Section 156 of the Customs Act, 1969 * Foreign Exchange Repatriation Regulation, 1972. * Foreign Assets (Declaration) Regulation, 1972.

Issues related to Economic Crimes Legislation:
Framers, practitioners and observers of the criminal law regard mens rea or the possession of a "guilty mind," a necessary defining guilty of a crime but this not always or even usually true of corporate crime. In the majority of corporate crimes, the intention to do harm to a victim is absent. Instead, corporate executives expose parties to a certain measure of risk. Whether this risk is acceptable or unacceptable, legal or illegal is a matter of interpretation.
The term ‘crime’ is also contentious as many of the harmful activities of businesses or occupational groups are not subject to criminal law and punishment but to administrative or regulatory law and ‘penalties’ or ‘sanctions’.
Issue Fairness of Legislation and Past Proceedings:
Because of spotty enforcement, white-collar criminals are far more likely to get away with their crimes than poor folks. And when they are caught, wealthy corporate executives can take refuge in their powerful friends and associates while availing themselves of high-priced lawyers, jury-selection experts and mitigation specialists. The truth is, most corporate crooks get the best representation money can buy, and money, in the criminal justice system can buy quite a bit.

Unlike average criminal defendants, who have few reasonable expectations about where they will do their time, white-collar criminals usually employ consultants to help insure that the defendants serve their sentences under conditions of confinement that, while never pleasant, are nonetheless tolerable.
Corporate offenses very, very rarely result in criminal prosecution and administrative agencies rarely slap corporation with huge fines. When it comes to conviction, the higher the socioeconomic status of the offender, the stiffer the sentence juries vote for.
Challenges in Combating Economic Crime:
Any type of fraud is difficult to detect and stop because it contains a fundamental element of deceit. White-collar crime is not a classic, clear-cut case of deviance. It has one foot in conventionality and one foot in deviance.
The bitter truth in Economic Crime is, we rarely send white-collar offenders to serve hard time. Because of their wealth, privilege and relative sophistication, white-collar criminals can count on gaining significant advantages at every stage of a criminal justice proceeding.
Measures need to be taken to Combat Economic Crime:
Most white-collar offenders are ordinary people who got into financial difficulty and who saw their way out of it through illegal and fraudulent measures. It is the "small fry" who gets caught, while the "big fish" get away because the "big fish" are more capable of insulating themselves from prosecution scrutiny.
There are more people occupying small time white-collar positions. So, it would be remarkable if there were many "big fish" arrested, since they are so rare to begin with.
Also, there is lot of work need to be done in effective investigations.

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