White-Collar Crimes: Types, Legal Principles, and Examples - Prof. Gerald L. Melton, Study notes of Criminal Law

Download White-Collar Crimes: Types, Legal Principles, and Examples - Prof. Gerald L. Melton and more Study notes Criminal Law in PDF only on Docsity! CRIMINAL LAW 3250 FALL 2012 MELTON LESSON ELEVEN WHITE-COLLAR AND ORGANIZED CRIME LESSON ORIENTATION: CHAPTER 9 IN THE TEXT OVERVIEW: White-collar crimes are offenses committed in the course of a person’s occupation or profession and frequently include prostitution, gambling, and obscenity (see Chapter 8) and offenses relative to the importation, manufacture, and supply of illegal drugs and alcohol (see Chapter 9). Environmental crimes and violations of the federal food and drug acts (see Chapter 11) are often included in the white-collar crime category, as are obstruction of justice and other offenses against the administration of justice (see Chapter 13). Sometimes violations of civil rights (see Chapter 6) are also categorized as white-collar crimes. In addition, a number of federal statutes (and to a lesser extent various state statutes) proscribe acts uniquely referred to as white-collar crimes. These include antitrust violations, bid rigging, price fixing, money laundering, insider trading, tax fraud, and various other offenses discussed in this chapter. Essentially, these offenses involve the use of deceit and concealment (as opposed to force or violence) to obtain economic benefits or advantages. Organized crime involves offenses committed by persons or groups who conduct their business through illegal enterprises. Organized crime figures often attempt to gain political influence through graft and corruption, and they frequently resort to threats and acts of violence in commission of white-collar offenses. Organized crime gained its greatest foothold during the period when the Eighteenth Amendment to the United States Constitution prohibiting the sale and distribution of alcoholic beverages was extant. By the time Prohibition was repealed in 1933, organized crime had become involved in many phases of our economy, often pursuing its interests through such illegal activities as loan sharking, gambling, prostitution, and drug trafficking. Protection rackets and other forms of racketeering have become the methodology of organized crime as it has infiltrated many legitimate business operations. There is often an overlap between white-collar crime and organized crime. This lesson addresses white-collar and organized crime and the overlap between the two. LEARNING OBJECTIVES:  What is white collar crime?  Legal Principles Governing White-Collar Crimes  Examples of federally prosecuted white-collar crimes  Organized crime and RICO Discussion: WHAT IS WHITE-COLLAR CRIME? Those who make a profession of the study of crime, (criminologists) and many in the public at large, think of white collar crime as offenses committed by persons in the upper socioeconomic status of our society. That is to say, those who wear white collars to work as opposed to blue collar workers. 1 The phrase "white-collar crime" was coined in 1939 during a speech given by Edwin Sutherland to the American Sociological Society. Sutherland defined the term as "crime committed by a person of respectability and high social status in the course of his occupation." Although there has been some debate as to what qualifies as a white-collar crime, the term today generally encompasses a variety of nonviolent crimes usually committed in commercial situations for financial gain. Many white-collar crimes are especially difficult to prosecute because the perpetrators use sophisticated means to conceal their activities through a series of complex transactions. The most common white-collar offenses include: antitrust violations, computer and internet fraud, credit card fraud, phone and telemarketing fraud, bankruptcy fraud, healthcare fraud, environmental law violations, insurance fraud, mail fraud, government fraud, tax evasion, financial fraud, securities fraud, insider trading, bribery, kickbacks, counterfeiting, public corruption, money laundering, embezzlement, economic espionage and trade secret theft. According to the Federal Bureau of Investigation, white-collar crime is estimated to cost the United States more than $300 billion annually. Although typically the government charges individuals for white-collar crimes, the government has the power to sanction corporations as well for these offenses. The penalties for white-collar offenses include fines, home detention, community confinement, paying the cost of prosecution, forfeitures, restitution, supervised release, and imprisonment. However, sanctions can be lessened if the defendant takes responsibility for the crime and assists the authorities in their investigation. Any defenses available to non-white-collar defendants in criminal court are also available to those accused of white-collar crimes. A common refrain of individuals or organizations facing white-collar criminal charges is the defense of entrapment. For instance, in United States v. Williams, 705 F.2d 603 (2nd Cir. 1983), one of the cases arising from "Operation Abscam," Senator Harrison Williams attempted unsuccessfully to argue that the government induced him into accepting a bribe. Both state and federal legislation enumerate the activities that constitute white-collar criminal offenses. The Commerce Clause of the U.S. Constitution gives the federal government the authority to regulate white-collar crime, and a number of federal agencies (see sidebar), including the FBI, the Internal Revenue Service, the Secret Service, U.S. Customs, the Environmental Protection Agency, and the Securities and Exchange Commission, participate in the enforcement of federal white-collar crime legislation. In addition, most states employ their own agencies to enforce white-collar crime laws at the state level. Another definition of white collar crime from Nolo’s Plain-English Law Dictionary: A variety of nonviolent financial crimes, generally committed by businesspeople or public officials,involving commercial fraud, consumer fraud, swindles, insider trading on the stock market, embezzlement, bribery, or other dishonest schemes. So what is white collar crime? Lying, cheating and stealing. That’s it; plain and simple. The term is now synonymous with the full range of frauds committed by individuals, business and government professionals. LEGAL PRINCIPLES GOVERNING WHITE-COLLAR CRIMES: 2 The Robinson-Patman Act of 1936 amended the Clayton Act. The amendment aimed to outlaw certain practices in which manufacturers discriminated in price between equally-situated distributers to decrease competition. The Per se Rule vs. the Rule of Reason Violations under the Sherman Act take one of two forms - either as a per se violation or as a violation of the rule of reason. Section 1 of the Sherman Act characterizes certain business practices as a per se violation. A per se violation requires no further inquiry into the practice's actual effect on the market or the intentions of those individuals who engaged in the practice. Some business practices, however, at times constitute anticompetitive behavior and at other times encourage competition within the market. For these cases the court applies a totality of the circumstances test and asks whether the challenged practice promotes or suppresses market competition. Courts often find intent and motive relevant in predicting future consequences during a rule of reason analysis. A presumption exists in favor of the rule of reason for ambiguous cases. Types of Prohibited Anticompetitive Schemes Congress designed these federal antitrust laws to eradicate certain frequently used anticompetitive practices of which the following are a few. Section 2 of the Sherman Act prohibits monopolization, attempts to monopolize, and conspiring to monopolize. Any such act constitutes a felony. A monopoly conviction requires proof of the individual having intent to monopolize with the power to monopolize, regardless of whether the individual actually exercised the power. Price-fixing occurs when a company or companies within a given market artificially set or maintain the price of goods or services at a certain level, contrary to the workings of the free market. Section 1 provides that price-fixing is an illegal restraint on trade, regardless of whether a vertical or horizontal scheme. A vertical scheme is a scheme among parties in the same chain of distribution. A horizontal scheme occurs among competitors on the same level. In 1911 vertical price-fixing schemes became a per se violation of Section 1 when the Supreme Court interpreted the statute in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373. However, in the landmark case of Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. __ (2007), the Supreme Court overturned the 96-year-old Dr. Miles precedent and held that courts should apply the rule of reason when analyzing vertical price-fixing schemes. The ruling renders all vertical limitation schemes subject only to the rule of reason. Collusive bidding occurs when two or more competitors agree to change the bids they otherwise would offer absent the agreement. Under Section 1, collusive bidding is per se illegal. A tying arrangement is an agreement by a party to sell one product only on the condition that the buyer agrees either to buy different products from the seller or not to buy those different products from another seller. Tying arrangements are subject to the rule of reason unless the arrangement shuts out a substantial quantity of commerce in which case the scheme is per se illegal. Section 2 makes illegal a firm's refusal to deal with another firm if the refusing firm refuses for the purpose of trying to monopolize the market. Meanwhile, section 1 prohibits a group from refusing to deal with a particular firm. A group refusal to deal is known as a group boycott. Because of seemingly contradictory Supreme Court decisions over the years, the question of whether group boycotts are subject to the rule of reason or a per se rule has been left murky. 5 Exclusive dealing agreements require a retailer or distributor to purchase exclusively from the manufacturer. These arrangements make it difficult for new sellers to enter the market and find prospective buyers, thus depressing competition. However, because companies widely-use requirements contracts, which essentially are exclusive dealing agreements, for purposes that promote competition, exclusive dealing arrangements only face rule of reason scrutiny. Below-cost pricing intended to eliminate specific competitors and reduce overall competition is known as predatory pricing. Section 2 disallows this conduct. In Brooke Group Ltd. v. Brown & Williamson Tobacco, 509 U.S. 209 (1993), the U.S. Supreme Court devised a two-part test to determine if predatory pricing had occurred. First, the plaintiff must establish that the defendant's production costs surpass the market price charged for the item. Second, the plaintiff must establish that a "dangerous probability" exists that the defendant will recover the investment in above-cost inputs. In Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc. (05-381) (2007), the Supreme Court said that this test also applies when determining if a predatory bidding scheme exists. Exemptions from anti-trust laws: Certain practices and organizations have received exemption from the federal antitrust laws. First, patent owners received an exemption in the Sherman Act because federal policy favors incentivizing innovation. Of course, the exemption does not go beyond the granted patent monopoly. Second, the Clayton Act exempted labor unions and agricultural organizations from the Sherman Act's reach. Third, the Securities Exchange Act of 1934 (SEA) heavily regulates securities trading; thus, certain activities that fall within the scope of the SEA are exempt from antitrust law. The U.S. Supreme Court took up this very issue in 2007 in Credit Suisse Securities (USA) v. Billing (05-1157). The Court decided that if securities regulation and antitrust law are incompatible, then the securities regulation prevails and individuals who would otherwise violate antitrust law receive antitrust immunity. Determining incompatibility requires the presence of the following four criteria: 1) behavior squarely within securities regulation; 2) clear and adequate SEC authority to regulate; 3) active and ongoing SEC regulation; and 4) a serious conflict between regulatory and antitrust regimes. Federal Trade Commission The Federal Trade Commission Act of 1914 (FTCA) bolstered the Sherman Act and Clayton Act by providing that the Federal Trade Commission (FTC) could proactively and directly protect consumers rather than only offer indirect protection by protecting business competitors. Congress endowed the FTC with the power to fill gaps remaining in antitrust law or to stop new business practices not yet invented at the time of the Clayton Act's enactment but contrary to public policy. Section 5 of the FTCA gives the FTC broad powers to cope with new threats to the competitive free market. RACKETERRING Set of illegal activities aimed at commercial profit that may be disguised as legitimate business deals. Common examples include fraud, extortion, bribery, and actual or threatened violence. Definition from Nolo’s Plain-English Law Dictionary: 6 Certain illegal activities, such as bribery, money laundering, prostitution, or extortion, committed as part of an ongoing criminal enterprise. COMPUTER AND INTERNET CRIMES Criminal activity involving the perpetration of a fraud through the use of the computer or the internet can take many different forms. One common form includes “hacking,” in which a perpetrator uses sophisticated technological tools to remotely access a secure computer or internet location. A second common criminal activity involves illegally intercepting an electronic transmission not intended for the interceptor. This may result in the interception of private information such as passwords, credit card information, or other types of so-called identity theft. Federal law defines computer fraud as the use of a computer to create a dishonest misrepresentation of fact as an attempt to induce another to do or refrain from doing something which causes loss. Criminals create fraudulent misrepresentation in a number of ways. First, they can alter computer input in an unauthorized way. Employees may embezzle company funds by altering input data. Second, criminals can alter or delete stored data. Third, sophisticated criminals can rewrite software codes and upload them into a bank’s mainframe so that the bank will provide its users’ identities to the thieves. The thieves can then use this information to make unauthorized credit card purchases. Violators may be prosecuted under:  18 U.S.C. § 506 No Electronic Theft Act  18 U.S.C. § 1028 Identity Theft and Assumption Deterrence Act of 1998  18 U.S.C. § 1029 Fraud and Related Activity in Connection with Access Devices  18 U.S.C. § 1030 Fraud and Related Activity in Connection with Computers  18 U.S.C. § 1343 Wire Fraud  18 U.S.C. § 1362 Communication Lines, Stations, or Systems  18 U.S.C. § 2511 Interception and Disclosure of Wire, Oral, or Electronic Communications Prohibited  18 U.S.C. § 2701 Unlawful Access to Stored Communications  18 U.S.C. § 2702 Disclosure of Contents  18 U.S.C. § 2703 Requirements for Governmental Access CREDIT CARD FRAUD Credit card fraud is a form of identity theft that involves an unauthorized taking of another’s credit card information for the purpose of charging purchases to the account or removing funds from it. Federal law limits cardholders’ liability to $50 in the event of credit card theft, but most banks will waive this amount if the cardholder signs an affidavit explaining the theft. Credit card fraud schemes generally fall into one of two categories of fraud: application fraud and account takeover. Application fraud refers to the unauthorized opening of credit card accounts in another person's name. This may occur if a perpetrator can obtain enough personal information about the victim to completely fill out the credit card application, or is able to create convincing counterfeit documents. Application fraud schemes are serious because a victim may learn about the fraud too late, if ever. Account takeovers typically involve the criminal hijacking of an existing credit card account, a practice by which a perpetrator obtains enough personal information about a victim to 7 The U.S. Supreme Court recently expounded on 10(b) in a pair of cases. In 2007 Tellabs, Inc. v. Makor Issues & Rights, LTD (06-484) determined the requisite specificity when alleging fraud. With Congress requiring enough facts from which "to draw a strong inference that the defendant acted with the required state of mind," the Supreme Court determined that a "strong inference" means a showing of "cogent and compelling evidence." In the 2007-2008 term, the Supreme Court determined that 10(b) does not provide non-government plaintiffs with a private cause of action against aiders and abettors in securities fraud cases, either explicitly or implicitly. See Stoneridge v. Scientific-Atlanta (06-43) (2008). BANKRUPTCY FRAUD Bankruptcy fraud is a white-collar crime that takes four general forms. First, debtors conceal assets to avoid having to forfeit them. Second, individuals intentionally file false or incomplete forms. Third, individuals sometimes file multiple times using either false information or real information in several states. The fourth kind of bankruptcy fraud involves bribing a court-appointed trustee. Commonly, the criminal will couple one of these forms of fraud with another crime, such as identity theft, mortgage fraud, money laundering, and public corruption. Nearly 70% of all bankruptcy fraud involves the concealment of assets. Creditors can only liquidate those assets listed by the debtor; thus, if the debtor fails to reveal certain assets, the debtor can keep the assets despite having an outstanding debt. To further conceal the assets, businesses or individuals may transfer these unrevealed assets to friends, relatives, or an associate so that the asset cannot be located. This type of fraud raises the risk and costs associated with lending and becomes passed on to others who wish to borrow money. Petition mills are one type of bankruptcy fraud scheme on the rise in the United States. Petition mills purport to keep financially-strapped tenants from becoming evicted by passing themselves off as a consulting service. While the tenant believes to be receiving help in avoiding eviction, the petition mill actually files the tenant for bankruptcy and drags out the case. Meanwhile, the “service” charges exorbitant fees, empties the tenant’s savings account, and ruins the tenant’s credit score. Multiple filing fraud consists of filing for bankruptcy in multiple states, using the same name and information, using aliases and fake information, or some combination thereof. Multiple filings slow down the court systems’ ability to process a bankruptcy filing and liquidate the assets. Often, multiple filings provide more cover for a debtor trying to engage in the concealment of assets. A proceeding in which suspects are charged with bankruptcy fraud is criminal in nature. Federal prosecutors can bring charges for suspected bankruptcy fraud under 18 U.S.C. § 151. Proof of fraud requires showing that the defendant knowingly and fraudulently made a misrepresentation of material fact. Bankruptcy fraud carries a sentence of up to five years in prison, or a fine of up to $250,000, or both. See 18 U.S.C. § 152. MAIL FRAUD Mail fraud occurs when the U.S. Mail is used in furtherance of a criminal act. In order for a defendant to be convicted under 18 U.S.C. 1341for committing mail fraud, the follow elements must be satisified: (1) the defendant must have been engaged in a scheme to defraud; (2) the scheme must have involved material misstatements or omissions; (3) the scheme resulted, or would have resulted upon completion, in the loss of money, property, or honest services; (4) the 10 defendant must have used of U.S. mail in furtherance of scheme to defraud; and (5) the defendant used or caused the use of U.S.mail. See 18 U.S.C. 1341 - Mail Fraud MONEY LAUNDERING Money laundering refers to a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly-obtained money. The money laundering process can be broken down into three stages. First, the illegal activity that garners the money places it in the launderer’s hands. Second, the launderer passes the money through a complex scheme of transactions to obscure who initially received the money from the criminal enterprise. Third, the scheme returns the money to the launderer in an obscure and indirect way. Tax evasion and false accounting practices constitute common types of money laundering. Often, criminals achieve these objectives through the use of shell companies, holding companies, and offshore accounts. A shell company is an incorporated company that possesses no significant assets and does not perform any significant operations. To launder money, the shell company purports to perform some service that would reasonably require its customers to often pay with cash. Cash transactions increase the anonymity of customers and therefore decrease the government’s ability to trace the initial recipient of the dirty money. Money launderers commonly select beauty salons and plumbing services as shell companies. The launderer then deposits the money with the shell company, which deposits it into its accounts. The company then creates fake invoices and receipts to account for the cash. Such transactions create the appearance of propriety and clean money. The shell company can then make withdrawals and either return the money to the initial criminal or pass the money on to further shell companies before returning it to further cloud who first deposited the money. Criminals often use offshore accounts to hide money because they offer greater privacy, less regulation, and reduced taxation. Because the U.S. government has no authority to require foreign banks to report the interest earned by U.S. citizens with foreign bank accounts, the criminal can keep the account abroad, fail to report the account’s existence, and receive the interest without paying personal income taxes on it in the U.S. To combat this criminal activity, Congress passed the Bank Secrecy Act of 1970, which requires banks to report any financial transactions of $10,000.01 or more. Congress followed up this Act sixteen years later with the Money Laundering Control Act of 1986, which rendered money laundering a federal crime. In 2001, Congress passed the USA Patriot Act, which expanded the scope of reporting responsibilities and included more types of financial institutions in an effort to combat the financing of terrorist activities. In a pair of 2008 decisions, the U.S. Supreme Court clarified the federal statute criminalizing money laundering. Cuellar v. United States (06-1456) determined that to prove money laundering, prosecutors must show that concealment of money must be for the purpose of concealing ownership, source, or control rather than for some other purpose. In United States v. Santos (06-1005), the Court held that the word “proceeds” in the federal laundering statute referred only to criminal profits and excluded criminal receipts. Thus, the Court reversed a pair of convictions based on money laundering involving the pay out of winnings in an illegal gambling ring. See 18 U.S.C. 1956 Money Laundering ECONOMIC ESPIONAGE 11 In general terms, economic espionage is the unlawful or clandestine targeting or acquisition of sensitive financial, trade or economic policy information; proprietary economic information; or technological information. The Economic Espionage Act of 1996 (EEA), 18 U.S.C. §§ 1831-1839, defines the term "economic espionage" as the theft or misappropriation of a trade secret with the intent or knowledge that the offense will benefit any foreign government, foreign instrumentality, or foreign agent. See 18 U.S.C. § 1831. The act of receiving, purchasing, or possessing a trade secret known to have been stolen or misappropriated, as well as any attempt or conspiracy to commit economic espionage are punishable as a federal crime under the EEA. See Id. COUNTERFEITING Counterfeiting occurs when someone copies or imitates an item without having been authorized to do so and passes the copy off for the genuine or original item. While counterfeiting is most often associated with money it can also be applied to designer clothing, handbags and watches and other consumer goods. 18 U.S.C. 470-514 Counterfeiting and Forgery ORGANIZED CRIME AND RICO: During prohibition organized gangs trafficked in liquor, became involved in gambling, in prostitution and other vices. After prohibition, they expanded into narcotics, and other activities. Among other things, they infiltrated legitimate businesses and developed complex and secretive organizational structures of their own. In the 1960s and 1970s, congress passed several laws designed to combat organized crime. Among the most significant of these was title IX of the Organized Crime Control Act of 1970. Title IX was entitled Racketeer Influenced and Corrupt Organizations (RICO). The RICO act provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. Definition of RICO from Nolo’s Plain-English Law Dictionary: A federal law, passed in 1970, that allows prosecution and civil penalties for certain acts (including illegal gambling, bribery, kidnapping, murder, and money laundering) performed as part of an ongoing criminal enterprise. RICO has been used to prosecute members of the mafia, the Hells Angels motorcycle gang, and Operation Rescue, an anti-abortion group, among others. The RICO statute is a complicated law dedicated to breaking up organized crime. The law was designed to achieve that goal by targeting enterprises and individuals found to have engaged in patterns of racketeering activity. Under the RICO statute, racketeering is legal terminology for the “act or threat of murder, kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance or listed chemical.” The list continues, with other racketeering offenses ranging from the fogery of passports to mail fraud. Under the far-reaching influence of the RICO statute, an enterprise or person can be convicted of and face charges for racketeering in any territory or possession of the US, allowing the act's authority to be exercised across all state lines as well as in areas such as Guam and Puerto Rico. 12