Inside the minds of white collar criminals
Mark wasn’t the only one doing some trading for himself. Like any stockbroker, he regularly received privileged information. So when a confidential source told him that the shares of a pharmaceutical company were going to explode due to the approval of a new drug, he decided to borrow money from the company to close the deal. .
Unfortunately, this time someone reported. Mark was charged with insider trading and securities fraud. His reputation as an upright citizen has fallen apart. His fair-weather friends avoided him like the plague.
The term “white collar crime” has been associated with educated and affluent people since it was coined in 1939 by criminologist Edwin Sutherland. White-collar crimes refer to financially motivated, non-violent wrongdoing that occurs in an office environment and involves the manipulation of accounting and financial systems.
Typical white collar crimes include Ponzi schemes, insider trading, fraud, corruption, forgery, money laundering, embezzlement, cybercrime, identity theft and breach of copyright.
Sutherland pointed out that white-collar criminals are very different from street criminals, in that they are usually married, have above-average educations and high incomes. They also tend to be landlords and have fairly strong ties to their community, family, and religion. They apparently have no reason to break the law, so when their crime is detected, a common reaction is disbelief.
White collar crime is a serious problem. High profile fraud is estimated to cost the global economy more than US$5 trillion every year. White-collar crime may explain why public approval and business confidence have eroded. According to a Gallup investigationbusiness leaders rank near the bottom on a list of professions in terms of perceived ethics and honesty.
Financial costs aside, white-collar crimes can also prove deadly. Consider the Bhopal disaster in India in 1984, when a massive gas leak at a pesticide factory – later blamed on corporate negligence – killed 8,000 people and injured half a million immediately afterwards.
Or take the Chinese milk scandal of 2008, when it was discovered that senior executives at a dairy company knew a toxic compound was being added to its dairy products. This led to the poisoning of 300,000 people, mostly infants.
The 2008 recession was the result of manipulation of the housing market by Wall Street firms, which cost millions of Americans their homes and their savings.
Why do these seemingly respectable people do these horrible things? What motivates them? Are they a product of their environment or bad apples from the start?
The Fraud Triangle
Three major forces, according to auditors, often explain an individual’s decision to commit fraud: pressure, opportunity and rationalization.
A company can pressure its employees to participate in a crime by offering a reward or compensation, as was the case with Wells Fargo account fraud scandal. If employees believe they are being ordered to do something wrong, they may not feel personally responsible.
Inadequate internal controls and accounting systems, a toxic and unethical corporate culture, or dysfunctional leadership can all pave the way for fraud.
When a company focuses exclusively on profits, white-collar criminals can justify acting for the good of the organization. or that “everyone does it”. Describing unethical practices as victimless crimes also promotes rationalization.
The People’s Equation
A delicate “dance” between situation and personality dynamics is always in play. This involves a number of factors, such as the following.
Conspicuous drinking is commonly used as a marker of success. Some people feel a greater need to parade around with material objects to indicate their social position, power, and status. These public displays of wealth give them a high that fades quickly. Soon their income isn’t enough, so they start looking for shortcuts to more money.
If the context presents enough pressure and opportunity, low self-control can facilitate white-collar crime. This can make some people more prone to lying and cheating, at least temporarily. And risk taking can turn into a drug. But just like the high associated with material possessions, the effect wears off quickly. People then have to engage in increasingly risky behaviors to get the same high – until they self-destruct.
Narcissistic individuals are concerned only with what can benefit them or improve their position. They have rights and believe that the rules apply to everyone except them. They also think no one is smart enough to catch them.
Psychopaths feel neither guilt nor remorse when they exploit others for personal gain. This type of behavior is also found in organizations. Some people are always looking for opportunities to fulfill their deep need for power, status and money. They are adept at quickly assessing situations and manipulating others to cooperate with their schemes. Even when they get caught, their charm often helps them avoid the consequences.
Corporate psychopaths in leadership positions can alter what are perceived as acceptable norms in a company. This in turn normalizes the types of behaviors that can foster wrongdoing.
White Collar Crime Prevention
Most white-collar crimes are detected by whistleblowers, who then notify journalists and law enforcement. Unfortunately, governments often lack the resources to investigate every allegation. This means that many white collar criminals get away with their crimes. So what can be done to prevent them in the first place?
An ethical and transparent culture is the foundation of effective corporate governance. The leaders of an organization need to make it very clear that ethics are important. They must embed a culture of compliance in all decision-making processes. They should have zero tolerance for any form of “creative accounting” and other dishonest activities.
Regular employee surveys and 360-degree feedback systems can help senior managers assess the ethical health of their organization. Leadership development programs can act as early warning systems, indicating whether the corporate culture is built on rock or on sand.
Obtaining these data points can prevent the common corporate obsession with the balance sheet. In fact, everythingnumber games‘ may contribute to long-term disaster despite their short-term benefits.
Entrance and exit
Of course, society also shapes people’s personalities. Background checks and due diligence can play a vital role in preventing white collar crime. In addition to carefully screening newcomers, organizations need to offer well-designed onboarding programs.
When exit interviews are conducted respectfully, they can help uncover any corporate misconduct or toxicity. They can also serve as an early warning system, putting potential problems on the company’s radar.
Appropriate internal reporting mechanisms are essential to prevent white-collar crime. Strict control systems, including ethical standards, can help organizations significantly reduce the financial and reputational risks associated with fraudulent activity.
Remuneration systems, which have direct social and moral effects, are obvious candidates for rethinking. Too often, compensation systems fall victim to handling. Also, ethics and compliance could be part of the annual review process. Organizations could even incentivize ambitious people by rewarding those who demonstrate commitment to their ethical values.
The responsibility of business schools
The challenge with business schools is that the students they attract — who will go on to lead organizations — already have a set of values in their own right when they arrive. They have internalized the values of their family members, friends, peers and teachers.
While teaching ethics at this stage is daunting at best and impossible at worst, something needs to be done. Too often graduates have been taught that a businessman’s only responsibility is to make money. Business ethics often require leaders to put the interests of others before their own.
With a better understanding of the impact of white-collar crime, business schools are gradually placing more emphasis on ethics. But unless all professors instill a strong moral compass in their curricula, new robber barons will continue to emerge. Cautionary tales about the consequences of unethical behavior should be part of every lesson.
Fortunately, a new generation of leaders seems to be as concerned about ethical decisions as they are about financial results. To say that the sole purpose of a business is to maximize profit has become obsolete. A growing number of organizations understand that profit cannot be their only goal if they want to engage their employees.
Many leaders now recognize that companies can do more to address societal ills. Suddenly, business schools realize that they had better follow the worldview of their students. In time, they may produce fewer and fewer Gordon Gekkos who believe “greed, for lack of a better word, is good.”