November 14, 2014
Preventing Fraud & Other White Collar Crimes (Part 2)
This is a continuation from a previous post on my thoughts related to how to prevent and mitigate fraud. To quickly recap, I provided a list of eight areas that tended to be common amongst myself and the dozens of white collar individuals I’ve interacted with over the past several months. To see the previous post and the full list, click here The topic of this post is diving deeper into the first two on the list:
- Lack of awareness of the laws
- Viewed activity as a minor thing (i.e. not egregious)
This first area, being unaware of the applicable laws, is not something that I can claim. I certainly was aware that a felony was being committed when I provided sensitive information to my co-defendant. Harkening back to my Chartered Financial Analyst (CFA) study days, I recall this topic being the first and central point in the ethics curriculum. Rule #1 of business ethics — Know all applicable laws.
Yet, so many people that I’ve conversed with were caught off guard when their day of reckoning came. Here’s an example: there’s a guy in here who owned an insurance company. After researching some tax issues for his company, he had decided there were certain amounts of taxes that he did not have to pay based on his interpretation of the statutes. Rather than just omit the payment, he wrote a lengthy letter to the IRS detailing his research, rationale and conclusion. He requested that they establish contact if they felt differently regarding the matter. For that tax year, he received no response from the IRS. Radio silence the following year as well. There were, in fact, several years without any peep from the IRS.
Then one day, out of the blue, he was arrested for tax evasion and conspiracy charges. No letter or communication from the IRS. No dialog. BAM – prison! Without getting into too many specifics, he was hit with several years of jail and several million dollars of restitution. In his eyes, he did not break the law. He even notified the authorities of what he was doing! So, he most certainly did not think he was breaking the law. But it doesn’t matter what he THINKS or what any of us THINK. In terms of the law, the only opinion that matters is what the government says. This might be an extreme example, but it highlights the fact that being aware of the law and also how the government interprets the law is crucial. It doesn’t matter what you think. Know any, every and all applicable laws related to how you’re conducting business. Be above reproach. Don’t leave anything to chance. And most certainly, do not assume that you will be able to reason with the government if “that day” arrives.
The second commonality amongst us white collar inmates is that we considered our respective illegal activities as being relatively minor. This I most certainly can relate to. I knew that passing information to someone else was illegal and that it was a felony. But I also know that gambling online is a felony. As is burning DVDs that don’t belong to you. As is downloading music from one of those online services. Let me reiterate before someone misinterprets my point – I’m not justifying my behavior by pointing to other bad behavior. What I’m saying is that the majority of the people reading this blog have likely committed some sort of “felony” in their lifetime, perhaps repeatedly. You knew you were doing something wrong but you didn’t view it as that big of a deal. In a way, that line of thinking was dominant for me in this instance. Part of the reason that I was able to do this act was the fact that I wasn’t actually harming anyone else or stealing from another person or institution (more on this topic and the “victimless” crime nature of insider trading in the next post). While I wouldn’t compare insider trading to online gambling, but by the letter of the law — a felony is a felony.
But enough about me. Let me once again introduce a different example from someone else I’ve met in here. He owned a company and paid his employees in gold for their compensation. This was written in the employee contracts and everyone was on board with this arrangement. Everyone except the government. While I don’t know the specifics of his case, I know that for that act he is serving an 8-year sentence. 8 years! Even if the government didn’t like what he was doing and considered this practice illegal, how in the world does an 8-year sentence appear fair and reasonable? I can tell you that he most certainly did not consider his activity as “egregious” and I suspect the majority of the readers would consider 8 years a lengthy sentence for the crime.
But once again, what’s the lesson here? It doesn’t matter how YOU view the activity. If you are doing something illegal, you leave yourself vulnerable to being aggressively pursued by the government and being made an example of. Thinking that the government would not apply pressure to you or trying to compare your proclivity to worse behavior is a fool’s errand. If you do something that puts you in the crosshairs of the DOJ, you are already well past the line.
So how can the discussion of these two areas prevent fraud?
- Just know the law. Be vigilant about it. If you’re dabbling in a gray area, get out immediately. It’s just not worth it.
- “I fought the law and the law won. I fought the law and the law won.” It’s not just a catchy song. It’s the truth. ~97% of federal indictments end in a guilty verdict. You might not view your actions as heinous. You might not consider yourself a scheming mastermind. But don’t even put yourself in the situation where you’re having to defend your actions to the government. For every Mark Cuban (winning his insider trading case vs the SEC), there are dozens upon dozens of little guys who lose. If you fight the governmet, you will lose. So don’t try fighting them. Knock off whatever “minimal” illegal activity you’re doing and shape up.
To conclude, the next post will discuss the next three commonalities between white collar criminals:
- Strong sense of rationalizing away the wrongfulness of their actions/quick to justify activity
- No prior run-ins with the law or any other illegal activity
- Didn’t think they’d ever get caught
Stay tuned and thanks for reading!