White Collar Crime, Its Factors, Theories, and Deterrence Methods

In 1939, the phrase “white-collar crime” was coined by American sociologist Edwin Sutherland to define the illegal acts perpetrated both by individuals and organizations of higher statuses while operating in a legitimate occupation. In general, white-collar crimes are non-violent crime which are committed mostly in a business or corporate context, wherein the main motivation is financial – to obtain or avoid losing money, property, or services, to secure a personal economic gain or business advantage. Such crimes include fraud, money laundering, identity theft, bribery, Ponzi schemes, insider trading, and cybercrime among others.

Though non-violent in nature, incidences of white-collar crimes can affect more individuals than the traditional street crimes and can bring significant financial, emotional and physical damage for the victims. For example, a single scam can wipe-out the livelihood and life savings of a person, or it can cost partners or clients a big amount of loss which can lead to closure of a company and loss of jobs for its employees. White collar-crimes are often committed by people such as company directors, officers, employees, partners and professionals, who in most other circumstances, would be considered as ideal role models for society. This then raises the question, why would someone with so much going for them choose to risk everything they have by breaking the law?

According to Donald Cressey’s fraud triangle, three fundamentals are required for fraud to exist and these three can be used to identify fraud before they occur or by assisting in the reactive investigation process. A typical fraudster will first have an incentive or pressure, usually financial pressure, then he or she will take advantage of an opportunity that is commonly manifested as a control weakness. Finally, the fraudster will rationalize his or her deed using an attitude or mind-set that carrying out the act of fraud will resolve an immediate problem or need. 

An opportunity is a situation or combination of situations that opens the door for fraud to occur. For white-collar crimes, the style of opportunity focus on the situational factors of the industry, the corporate environment of the workers and the current status of the organization. A first opportunity occurs via the industry’s culture, norms and expectations. For example, finance professionals are rewarded for short-term profits, so to maximize their performance-based compensations, some proceed to bypass the existing laws. In the 2017 Wells Fargo scandal, CEO Tim Sloan stated that they had an incentive plan in their retail banking group that drove inappropriate behavior which leads thousands of their employees to cheat. The Volkswagen (VW) emission scandal is a classic example of the management’s disregard for ethics which also leads for the firm to breach the security laws.

The second opportunity is presented through the firm’s structure and culture. Increased size of the company also increases the probability for illegal activities to occur due to communication and coordination gaps and complications. The A.B.C. typology explains the differences between a bad apple (an individual acting alone), a bad bushel (when there are accomplices and thus collusion is involved) and a bad crop (when the organization's leaders engage in corrupt behavior). The bad crop syndrome can even afflict an entire industry, as recently seen in the case of the LIBOR (London Interbank Offered Rate) scandal that has tarnished the reputations of many large banks such as Barclays, Union Bank of Switzerland, and the Royal Bank of Scotland, which have engaged in extremely questionable behaviors. 

The materialistic view in business produces a culture where the desire to get more profits has the possibility to drive business people to perform actions that can be harmful to the society. Hubris due to success can create and promote a culture of tolerance for breaking the law. In 2015, Hans-Dieter Potsch, chairman of Volkswagen’s supervisory board, admitted that their tolerance for breaking the rules led to the Volkswagen scandal.

Opportunity builds a setting where deterrence theory, rational choice theory and general strain theory can take their course as motivation. These theories deal with the decision of whether a crime will be committed depending on the situation that is presented. 

The general deterrence theory deals more with the prevention of the illegal act and focuses more on what happens when the decision maker believes that the risk is greater than the potential reward. Whilst this may be more of a demotivational theory, it still fits under the motivational aspect of the fraud triangle. The deterrence in white-collar crime mostly comes from jail time but it may also include public humiliation, loss of respect and collapse of an entire organization like in the case of ImClone. 

Rational choice theory emphasizes more about the motivations that persuade the decision maker to commit the crime. Crimes that are committed by organized criminals are purposive in nature and illustrate rational choice factors such as costs against benefits calculations. Rational choice theory makes committing crime a decision about the usefulness of the circumstances.

In general strain theory, it explains how individuals who are unable to reach their economic goals through legal channels experiences strain and may try to use deviant means to get what they desire to achieve. Some strains or stressors that are relevant to explanation of white-collar crimes includes the blockage of economic goals, exposure to a range of other economic problems, the inability to achieve monetary and status goals, and other stressors at work. Whether these results in a white-collar crime is also influenced by other factors such as the individual’s coping skills and resources, social support, social control, opportunities to commit the crime, and the perceived cost and benefits of the white-collar crime. Economic strain can be both on an individualistic or corporate level where crimes are committed strictly for personal gain. 

The final stage of the fraud triangle is rationalization which also correlates to the justification of the act. Justifications can come in many different forms before and after the crime is committed. When individuals commit crimes, there is a cognitive dissonance between the moral standards and the bad behavior. To close this gap, many white-collar crime offenders use different kinds of justifications which may occur before the act as discussed on the rational choice theory, or they may be retroactive as explained on Sykes and Matza’s neutralization and drift theory which claims that white-collar criminals use techniques of neutralization to avoid any feeling of guilt and justify their actions. 

The first neutralization technique is the denial of responsibility. Most organizational crimes are committed by an expanded network of people who gave the order to act, to the people who executed the action, up to the people who tried to hide the tracks and cover it up. Because of the hierarchal structure of most business, blame is often tossed between the superiors to their inferiors, and vice versa.

In denial of injury, the offender often excuses his or her behavior if no clear harm exists. White-collar crimes are often perceived as a faceless crime because the offender never really see or meets the people who are affected by their crime.

The denial of the victim technique stresses claims that the victim is not actually hurt because the offender only collects what he is owed.

The next technique is called the condemnation of the condemners where the offender will blame the system or anyone who judge them for their actions and criticize the motives and methods of those who try to enforce and indict them.

Other neutralization techniques include the appeal to a higher authority, the “everybody else is doing it” mindset, and lastly, is the straightforward disregard to the laws and regulation that is put in place. These three techniques are considered as minor since these are not typically applied to white-collar crimes.

Even if businesses that break the law often pay big fines, this doesn’t provide any incentive for companies to change their values that lead to that illegal activity. More often than not, large fine and bad publicity are viewed as a cost of doing business instead of a deterrence for companies to disobey the law. The U.S. Department of Justice focuses on corporate prosecutions instead of the people who run them because it is easier to prosecute a corporation than to build a criminal case against individual defendants. It takes more time and effort for the prosecutors to build a case against the higher-level executives, and those cases carries with it the significant risk that such effort may not be successful to win at trial. 

Prosecutors have also applied a deferred prosecution or non-prosecution agreement to corporate prosecutions provided that the business agrees to pay a fine and they adopt measures to repair their corporate culture and reduce the risk of misconduct. However, research from the U.S. Sentencing Commission shows that more than half of the serious fraud offenders in the last few years are recidivists thus, deferred prosecution hasn’t been an effective deterrent to commit white-collar crimes.