why we can’t understand the scope of white-collar crime
We live in what seems like yet another golden age of scams. Sure, there might not be snake oil salesmen on every corner trying to cure everything from hair loss and colds to aging and kennel cough, but we have their equivalents running massive online storefronts. And we may not have outright pyramid schemes, but we have their legalized versions called MLMs. As for just about every other kind of con, we’ve got those too. From outright frauds like the Fyre Festival and the accounts of how it happened, Theranos, Bernie Madoff’s vast Ponzi scheme, to tax evasion by corporations and scandals stemming from the Panama Papers and whistleblower complaints, it seems that white-collar criminals are on a pillaging spree that would make pirates blush.
But even though white-collar crime is pervasive and many billions of dollars in fines get thrown around every year, it seems like more such crime just pops up in the news the next day and the punishments are just a pittance compared to the sheer scope and brazenness of the crimes in question. The question we need to ask here is why. It’s not just a trivial issue. When the fine or punishment for the crime is less than the profits from it and no one ends up in jail, companies will simply factor the cost of fraud and embezzlement into their business plans, do whatever they please, then toss a few dollars at the regulators, barely stopping themselves from saying “get the country something nice toots and don’t spend it all in one place!” as they do.
the complexity of prosecuting white-collar crime
One of the nastiest things about white-collar crime vs. the regular kind with which we’re all familiar is that it’s complex, abstract, and often takes place not in blatant violation of the law but in its margins, and tends to start off as cutting a few corners, later snowballing into full blown crime as little lies have to turn into big lies or an ethically questionable tactic to boost key metrics has to be escalated to keep the momentum going for analysts and investors. So, much of the corporate tax evasion we see today is unethical but actually quite legal, and the money in many anonymous offshore accounts may have not gotten there in the most legal of ways, but once it’s there, it’s not breaking any laws and the trail to its origin is missing.
Even if you know something is being done illegally, good luck tracking down the full proof in the tsunami of paperwork deliberately made into a confusing web that could take years and a crew of forensic accountants and lawyers to fully uncover. After that, you now also have to deal with law firms paid millions to keep their clients as solvent as possible and out of jail, and lawyers ready and willing to drag out discovery and other aspects of the prosecution for years longer unless you have a smoking gun. But then even when you get to trial, you have two major and pressing issues. Juries will be afflicted by something known as the scope severity paradox and may not understand what crime you’re trying to prove because the laws are so complex.
when committing a crime, go big and complicated?
One of the recent investment scandals flying under the radar is laid out in the documentary The China Hustle. It tries to detail how some $50 billion were lost by investing in Chinese companies that outright lied about their market, capacity, and sales figures, and because relevant Chinese authorities view the fraud as happening in the U.S., they refuse to prosecute any of the people involved on the mainland. And since much of that money came from public pensions and 401k accounts, the number of those affected could be in the tens of millions. But ask a jury to figure out the appropriate fines for this fraud and numerous studies will show you that they simply can’t do it. There are too many people hurt, and the numbers are too large.
In fact, anything over 20 or 30 victims and the stories start blurring into faceless statistics that completely overwhelm the mind. This is why we often have to remind people the difference between a million and a billion by explaining that a million seconds is 11.5 days while a billion seconds is almost 32 years. Now ask a jury to imagine 50 people who are about to turn 32 and the combined number of seconds they’ve been alive is the amount of money lost. You’re just going to get confused stares because the human brain simply doesn’t work like that. We know it’s a lot, but just how much is such a squishy and abstract concept that it doesn’t make much of an impact when we have to actually apply it to something as concrete as a punishment.
And thanks to the complex laws and caveats involved, if you ask the same jury who should go to jail for this, you’ll also end up with a dilemma. Technically, the fraud was complicated enough that a lot of bankers pushing the stocks could’ve claimed to have done their due diligence and were just as taken in as the other victims. Jail the Chinese nationals recruited to lie on forms? China won’t extradite them, and they weren’t the only ones involved, but letting them off the hook seems very wrong. And those who solicited the forms could always claim they were lied to as well. The many layers of abstraction can be abused to increase confusion, lower liability, and plausibly deny one’s role, turning perpetrators into seemingly hapless victims.
how do we make punishments worthy of white-collar crime?
As was noted, battling the scope severity paradox and massive bureaucracy in white-collar crime prosecutions isn’t a nice-to-have item on a government’s agenda, it’s absolutely crucial to regain control over runaway crony capitalism and semi-legalized law-breaking. Having harsh punishments that claw back every cent of revenue from a fraudulent scheme and then some gives companies incentive to stay in the law. Knowing who approved what at every stage with the understanding that those involved are going to jail if they’re lying or abetting fraud could scare those paying to break the law into compliance. When you can no longer budget for crime and bribe the law to leave you alone, these crimes will finally stop paying.
One of the best ways we can do it is by creating something similar to mandatory minimums for white-collar crime. While it’s a bad idea for small time criminals, it may streamline prosecution and sentencing of crooks misusing and stealing vast sums of money and remove the issue of a jury stumped by the numbers. For example, if they’re guilty, they have to come up with 150% of the revenues to make everyone involved whole, plus a punishment for their scheme. Simple as that. All the jury has to focus on is whether a crime has been committed, with which we could also help by outlawing complex corporate structures and anonymous or fraudulent accounts and registrations, forcing full transparency and mandating streamlined organization.
In a way, we’re already doing the latter with laws mandating full disclosure and trying to get as many companies as possible to stick to GAAP, or generally accepted accounting principles. The problem is that we still have many loopholes allowing for every lenient point in the law to be abused and facilitate fraud, tax avoidance, and embezzlement. Companies will argue that the compliance will be expensive, and it will be. But why should their inconvenience and costs to stay within the law be our concern? If they’re already doing things right, their costs should be very similar to what they are now. If they need to massively restructure, we should take that as a sign that something was sketchy and is now being rectified.
the dirty open secret of governments abetting white-collar crime
Of course, there’s one more hurdle. Some governments directly benefit from facilitating white-collar crime and money laundering on enormous scales, especially when it comes to shady cash from Russia, China, and corrupt petrostates. The Seychelles, Cook Islands, and Macau helped countless unscrupulous characters launder trillions for a cut of the money until waves of bad PR forced them to at the very least pretend to care about the problem. And it’s not just exotic islands making bank from this. The city of London is also a white-collar criminal’s haven, while Vancouver has been rocked by its own money laundering scandals. And while officials pay lots of lip service to rooting our corruption, they often don’t try to stop it all that hard.
So, in a way, to properly combat white-collar crime, we need to get politicians who benefit from it to pass laws against it, and the only way to do that would involve international cooperation, which will be difficult considering how complicit the key global economies are and how much they’d stand to lose. Our only other option would be activist investors leading the change to divest from large companies with byzantine fiscal and legal structures, and channel their cash into cleaner, more transparent, and more compliant companies under the logic that the more opaque the numbers and structures, the more volatile your returns. But obviously, that would only work if we learn how to properly punish white-collar crime in the first place.