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Tag: White Collar Crime

Control Fraud as White Collar Crime And William K. Black

 This is fascinating. Essentially William K. Black is modifying out concepts of White Collar Crime (The Lord knows it needs it!).

White collar crime is a concept still burdened by its original definition. These kinds of crimes are no longer centered on such things as embezzlement but on subverting entire nations.

Here Black explains what he means by the concept –

Here’s a fuller treatment by the author.

When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse

Individual “control frauds” cause greater losses than all other forms of property crime combined. They are financial super-predators. Control frauds are crimes led by the head of state or CEO that use the nation or company as a fraud vehicle. Waves of “control fraud” can cause economic collapses, damage and discredit key institutions vital to good political governance, and erode trust. The defining element of fraud is deceit – the criminal creates and then betrays trust. Fraud, therefore, is the strongest acid to eat away at trust. Endemic control fraud causes institutions and trust to become friable – to crumble – and produce economic stagnation.

Read More!

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Warren: Consumer agency on small banks’ side (via MSNBC)

I have become concerned at the language of corporate ethics and white collar crime. It is not precise enough for what we are doing. I have talked many times about banks often very critically. But very seldom was I speaking of the local banks, the small banks. Generally, the despicable actions of the 24 large investment banks were what was motivating my anger. We don’t have the right words. Multi-national corporations shifting jobs overseas are not the same as close corporations composed of a single family running a large farm. We speak of corporations and banks but we mean only a few. We need a new language in business ethics. We need a new precision. Those small banks, those small businesses would be allies in the fight for morality and justice if not lumped in with the others everytime criticism is made.

We need a new language.

James Pilant


Small banks have expressed concern the new agency, set to open its doors in July, will add regulatory costs, making it harder for them to survive.

Warren told a gathering of community bankers that the opposite will happen as the agency simplifies regulations on products such as mortgages and seeks to crack down on non-bank lenders that went largely unregulated during the 2007-2009 financial crisis and are accused of shady lending practices.

“I know that you want a regulatory structure that doesn’t require an army of lawyers,” she said in remarks prepared for delivery at the Independent Community Bankers of America annual convention. “Big banks may be able to afford to hire all those lawyers, but you cannot.”

The McGowan Blog on Business Leadership and Ethics – Brand New Business Ethics Blog!

I want to extend a warm welcome to Larry Kahaner and his new blog. I have been reading it and I recommend you do so as well. I added it to my favorites and my blog roll. I believe that would make it the 12th blog I have recommended in that manner.

This is the intro for the first post on The McGowan Blog on Business Leadership and Ethics.

Larry Kahaner

This is the first of a twice-weekly blog on business leadership and ethics hosted by the William G. McGowan Charitable Fund. We will discuss current issues, ask questions, offer opinions and solicit your comments with the goal of spurring conversations among the business, government and academic communities.  The subject of whistleblowers has been a controversial topic lately, so let’s begin.

There are now three posts as follows:

Feb. 27 –

Is Whistleblowing  the Only Way to Spur Ethical Behavior?
( First Line) As a society, we Americans love whistleblowers. They are our folk heroes, our Davids versus Goliaths.

March 2 –  

Are B-Schools Teaching the Right Lessons About Ethics?After the Enron scandal and again after the Worldcom debacle, B-schools juiced up their ethics courses partly out of guilt, partly to deflect public and government criticism and partly because these scandals offered a perfect time for professors to sell ethics curricula to school leadership. We’re seeing the same thing now. Don’t get me wrong; I applaud any effort to increase ethics training – and I’m not so cynical to say that it won’t work this time – but have  previous attempts worked as well as we had hoped?

March 8 –
In light of these massive changes, what is the role that multinational U.S. business should play in American society considering that their main interests are moving offshore? Indeed, the U.S consumer and the U.S. government have all helped produce world-class, profitable and innovative American companies. What, if anything, do these companies owe the U.S. government and its people for making them the global giants that they are today?
 Here is a brief biographical sketch from the blog –
Larry Kahaner has been a business journalist for more than 20 years, a former Business Week Washington correspondent, and the author of many books about business ethics including: Values Prosperity and the Talmud: Business Lessons from the Ancient Rabbis; Competitive Intelligence: How to Gather, Analyze, and Use Information to Move Your Business to the Top; and Say It and Live It; The 50 Corporate Mission Statements that  Hit  the Mark, (co-author). You can reach him at: McGowanFundBlog@gmail.com.

BOA: BAD BANK, BAD BANK, WORSE BANK (via Livinglies’s Weblog) Part of The Foreclosure Crisis


This is how I feel as well. It’s a good read. Be warned, he’s really upset. But so am I when I’m dealing with this issue.

Here is my writing on the same subject. You can see that I get passionate about foreclosures too.

Robo-Signing Foreclosure Freeze Update (via Foreclosureblues)

Lots of Links on the Foreclosure Fraud Crisis (via Rortybomb)

“We Can Either Have a Rational Resolution to the Foreclosure Crisis or We Can Preserve the Capital Structure of the Banks. We Can’t Do Both” (via Foreclosureblues)

Sheldon Whitehouse Weighs In On The Foreclosure Crisis

Third Way Comments on Foreclosure Fraud Policy in the Post-Ibanez Landscape (via Rortybomb)

Foreclosure Speed Made Loan Modifications Impossible

The Vast Majority Of Foreclosures Were Done Correctly?

In total, I have 46 posts about the mortgage crisis.

James Pilant

BOA: BAD BANK, BAD BANK, WORSE BANK COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary Bank of America to Create Troubled Loans Unit BANK STILL ATTEMPTING TO KEEP FORECLOSURES A POLITICAL ISSUE AS LEGAL OPTIONS RUN OUT EDITOR’S NOTE: As for what this means for homeowners, it is obvious that BOA is trying to come up with some formula that will be politically acceptable the final result of which will still be that they will get hundreds of thousands o … Read More

via Livinglies’s Weblog

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BOA: BAD BANK, BAD BANK, WORSE BANK (via Livinglies’s Weblog)


This is how I feel as well. It’s a good read. Be warned, he’s really upset. But so am I when I’m dealing with this issue.

Here is my writing on the same subject. You can see that I get passionate about foreclosures too.

Robo-Signing Foreclosure Freeze Update (via Foreclosureblues)

Lots of Links on the Foreclosure Fraud Crisis (via Rortybomb)

“We Can Either Have a Rational Resolution to the Foreclosure Crisis or We Can Preserve the Capital Structure of the Banks. We Can’t Do Both” (via Foreclosureblues)

Sheldon Whitehouse Weighs In On The Foreclosure Crisis

Third Way Comments on Foreclosure Fraud Policy in the Post-Ibanez Landscape (via Rortybomb)

Foreclosure Speed Made Loan Modifications Impossible

The Vast Majority Of Foreclosures Were Done Correctly?

In total, I have 46 posts about the mortgage crisis.

James Pilant

BOA: BAD BANK, BAD BANK, WORSE BANK COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary Bank of America to Create Troubled Loans Unit BANK STILL ATTEMPTING TO KEEP FORECLOSURES A POLITICAL ISSUE AS LEGAL OPTIONS RUN OUT EDITOR’S NOTE: As for what this means for homeowners, it is obvious that BOA is trying to come up with some formula that will be politically acceptable the final result of which will still be that they will get hundreds of thousands o … Read More

via Livinglies’s Weblog

Accounting Fraud – Why Does It Pay So Well?

Can allowing the market to solve all problems really work? Why does accounting fraud work so well? What makes it profitable? Read the following from William K. Black’s column from the Huffington Post.

The “market” also does not deal effectively with externalities (and they can be lethal) and with market power. The neoclassical claim that cartels cannot persist and that potential entry solves prevents all serious ills proved false in the real world. Here, however, I will discuss only why control fraud turns “markets” perverse. Accounting control frauds are guaranteed to report high profits in the early years. This is why Akerlof & Romer (1993) agreed with white-collar criminologists that such frauds were a “sure thing.” I’ve explained why the four-part recipe for optimizing fictional accounting income maximizes executive bonuses — and real losses. In the interest of brevity I will merely mention four ways in which accounting control frauds make markets, and “private market discipline” perverse.

1. The fictional profits fool creditors and shareholders — they are eager to lend to and invest in firms reporting record profits. Rather than discipline accounting control frauds, creditors and shareholders fund their massive growth.

2. The fictional profits and the large bonuses they drive create a “Gresham’s” dynamic in which bad ethics tends to drive good ethics out of the marketplace. The CFO that fails to emulate the fraud recipe will report far lower profits in the near term and will fear losing his job. More junior executives whose compensation is based on the firm’s reported income have perverse incentives to engage in accounting fraud to ensure that the firm “hits the number” and have reduced incentives to blow the whistle on frauds.

3. Lenders engaged in accounting control fraud create “echo” epidemics of fraud. They use their powers to hire and fire and create compensation systems to create perverse incentives in other fields: among their employees, “independent” professionals, and agents (e.g., loan brokers).

4. When several large lenders follow similar fraud strategies they can hyper-inflate financial bubbles.

Accounting fraud is very effective in turning enormours profits for the fraudsters.

This kind of fraud can only be detected by other accountants. Generally speaking an examination of the books is going to take place only after there is suspicion that this is an accounting problem. In these kinds of schemes, that suspicion usually becomes significant at the very end of the fraud.

That’s why it’s important to discourage financial fraud by rigorous ethics training while accountants are in school, legal and corporate protection for accountants acting professonally, and serious penalties for abuse.
James Pilant

Fed Regulators Ride To The Rescue?

Three years ago, the states began to get concerned about mortgage fraud. So they asked the banks about it.

From the Washington Post

As foreclosures began to mount across the country three years ago, a group of state bank regulators suspected that some borrowers might be losing their homes unnecessarily. So the state officials asked the biggest national banks for details about their foreclosure operations.

Guess what! Some banks didn’t cooperate.

When two banks – J.P. Morgan Chase and Wells Fargo – declined to cooperate, the state officials asked the banks’ federal regulator for help, according to a letter they sent. But the Office of the Comptroller of the Currency, which oversees national banks, denied the states’ request, saying the firms should answer only to inquiries from federal officials. In a response to state officials, John Dugan, comptroller at the time, wrote that his agency was already planning to collect foreclosure information and that any additional monitoring risked “confusing matters.”

You see it’s a “federal” matter. If the states stepped in, it would “confuse matters.”

From further down in the article –

But even as it closed the door on state oversight, the OCC chose itself not to scrutinize the foreclosure operations of the largest national banks, forgoing any examination of their procedures and paperwork. Instead, the agency relied on the banks’ in-house assessments. These provided no hint of the problems to come until they had tripped the nation’s housing market, agency officials later acknowledged.

Basically, the foolish states get in the way when they investigate things, you know, “confusing matters.” This is especially true when you, the feds, are not under any circumstances whatever going to investigate the banks yourselves.

From further down in the article –

“Based on what we were seeing and what we were concerned about, it felt like a chronic underreaction at the federal level,” said John Ryan, a senior official with the Conference of State Bank Supervisors.

What John Ryan means is, “We could have cracked this case, but you made sure we couldn’t by using federal preemption to keep us out. Why don’t you explain that?”

I want to hear that too.

Further in the article –

Even when the mortgage industry itself identified possible flaws in foreclosure paperwork, the agency was slow to act. In September, Ally Financial suspended foreclosures after discovering problems with tens of thousands of cases. But even then, the OCC did not begin to examine the operations of other major banks. Instead, the agency asked them to undertake internal reviews and told them it would conduct its own examination later, an OCC official said.

So, after waiting three years and only after the mortgage industry admits problems, do the feds leap into action. Our valiant defenders armed with certain knowledge that something is wrong put the full weight of the federal government on the problem.

They ask the banks to do internal reviews.

Two weeks ago, for the first time, the OCC began sending its staff into the banks to examine their foreclosure operations, interview bank employees and review paperwork.

Three years. What’s the big deal? A few (well, we don’t actually have any concept of how many) actual citizens thrown from the homes that the banks didn’t own. Giant financial institutions are held in no way accountable because the federal government refused to act and made sure the states could not. What’s the big deal?

Tell me, which is worse? 1) Breaking the law or 2) Refusing to enforce the law.

Tell me, are any bankers going to jail, any homeowners going to get their houses back or is anybody at any of these helping services, whoops, I mean regulatory agencies, going to get fired, at least reprimanded?

None of these things are going to happen.

Don’t be mistaken, this no low level official making the call. This is the direct policy of the Obama Presidency.

Nothing else is possible.

Let’s ask the questions. Sit in the chair with our esteemed President. Three years ago, the states begin suspect widespread fraud in the foreclosure industry. They tell the feds.

What do you do? Well, you’d probably say, “We’d better ask some questions. Show us what you got. We’ll follow up.” Isn’t that about right.

Okay, what did happen. The feds used preemption to stop the state investigations and then conducted no investigations of their own.

Three years later, the banks admit that there are serious problems. Let’s sit you in the President’s chair again. The banks have admitted that they have used fraudulent affidavits in hundreds of thousands of cases and that their paper trail of ownership may have problems. I bet you would want to get some people down there to find out what’s going in. I suspect you would probably consider a criminal investigation.

What happened? The feds asked the banks to do an internal review.

Next, the fifty states attorney generals launch a joint investigative action against the mortgage companies. The media, national and international, are jam packed with stories of scandalous repossessions, like foreclosing on paid for homes.

Now after patiently waiting until two weeks ago, the President and you have the same opinion. “We’re going to investigate.”

That’s how you make decisions, isn’t it?

James Pilant

Andrew Weighs In On My Post, “Anectdotal Evidence Or Life In The Skycastle!”

My buddy Andrew adds his thought to my recent post, “Anectdotal Evidence Or Life In The Skycastle!”

While I agree that a more up to date central title system will help keep mistakes from happening, it is not the problem. The problem is with the banks and how they do business. Thats all there really is to it.

I also agree that we should help out as many people as we can with getting refinanced and keeping their homes. This should especially be done for the people who did fall victim to deceptive lending practices.

However, we must keep in mind that not EVERYBODY who defaults on their mortgage is a poor victim in this case. At the end of the day, these people signed the papers to a mortgage that they couldnt afford. Just because external influences say that its the right thing to do doesnt mean that it ACTUALLY is the right thing to do. When we excuse sheep-like behavior from citizens, then we end up with a population full of sheep. Would you want your son, or any family member for that matter, to make a major life choice based on what external sources say is best, or do you want him to figure out, on his own, what is best for him and go for it?

Dont get me wrong, I do sympathize with the people who honestly fell for deceptive lending practices and fraud. Those people had no way of knowing that they were about to be taken for a ride.

The problem is, like you said, the numbers arent out yet. There is no telling how many people were actually affected by the banks inability to do a simple task such as record keeping. It could be less than 1% or it could be 50%. Who knows at this point.

I believe the banks should have to own up to their mistakes. We can do this by mandating a moratorium on foreclosures until this mess can be sorted out. After everything is sorted out, if you deserve to have your house foreclosed on, then you lose your house. If not, then you get to keep it. Like I said before, this is not mutually exclusive from showing mercy towards those who did fall for these lending practices. Im all for helping them refinance into a more fair situation.

Do Your Duty!!

People ask me what can be done about corporate crime. Usually I say, “Enforce the laws we have on the books and make them do real prison time as well as pay fines.” That will go along way to stopping that kind of crime.

But there is something, we all can do – we can take our moral responsibilities seriously.

You see we depend on the state to enforce the law and generally we assume that is enough. It is not.

When a white collar criminal walks the street after a wrist slap of a fine, justice is defied and the nation tarnished.

But You have a duty to justice as well. People would think twice about committing crime if the passive acceptance that justice was done by prison or fine disappeared as people realized their continuing duty. How do you exercise your duty for justice? When you meet one of these thieves, walk to the other side of the street, refuse to shake their hand. When these criminals are hired by a new company that explains blithely that they want their expertise, you can stop doing business with that company.

But above all it is our silence that demonstrates our lack of commitment to the principles of justice and citizenship. These criminal should be afraid to walk the streets not because of physical danger but because they are likely to be cut or insulted.

“White collar” criminals (and I truly hate that phrase – whoever commits serious crimes against the larger society to the tune of millions of dollars is a scoundrel and a disgrace to be shunned and despised just like the lowest bank robber) live in a cocoon of comfort. They go to the right churches, have the right friends, zealous business writers will minimize or deny their guilt, and their connections in industry and government continue unabated. Everything they hear is that everybody does it and if only the little people, the little people like you, could understand their job pressures and the unreasonable nature of the regulations, and the cruelty of the prosecutor and the randomness of it all – (other people have done worse so why arrest me), you would not persecute them like Christ on the Cross but honor their contributions to society.

You have a duty to justice to shock them out of that cocoon, to make it hard for them to get work, to stigmatize them and make them suffer. Justice does not stop at the prison door. If we can maintain records of where pedophiles live, surely we can track the financial offenders who have stolen so much and damaged society so thoroughly.

It is for you as well as the government to wield the sword of justice. Do not forget your duty. Do not forget your nation and your responsibility to it. Remember the evil that these men have done.

Do not harm them physically, take them down a peg. Don’t hurt their bodies, hurt their feelings.

I tell you truly when the great malefactors of this society are punished by the public in this fashion, a very large portion of this kind of crime will simply disappear.

When we act as negatively toward a white collar criminal as we do a man wearing a shirt and pants with opposite patterns, when we are as critical of these criminals as we are of people who live on the streets, when we are as uncomfortable in their presence as when a thoughtless person talks loud and long on their cell phone, they will change their behavior.

James Pilant

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The Real Costs Of Business Crime

Business crime is sometimes known as white collar crime. This is a term developed by the criminal justice theorist, Edwin Sutherland. I strongly disagree with it. While I can see its theoretical strength in terms of analysis, I think it allows people to put business crime in a different box with different rules. Business crime, white collar crime, is crime. A businessman that takes a life is no different than a murderer on the street who kills for a wallet. A businessman who steals from the government is no different from a bank robber. A businessman who behaves unethically has no right to think of himself as any better than all other poor sinners who have failed the moral test.

Who are the victims of “white collar” crime? Who are the ones damaged by corporate crime? It is simple and accurate to say that those that have lost money such as investors. We could add institutional losers like pension funds, even endowment funds at universities and colleges have been victimized. But that would be too short a list. What if we added those whose careers had been blighted by having worked at a firm like Enron that simply ceased to exist? Their losses would include losing their job, having damage to their professional reputation by having worked at such a place and we could add the loss of pension funds and stock sharing arrangements.

What if we stop thinking about it in terms of direct losses? This isn’t a bank robbery which might net as much as $6,000 dollars. In the case of Enron we are discussing stock losses in the range of $50 billion dollars(This is just the stock losses not all those other pesky losses, just the stock losses). Let’s put this in perspective. The operating budget of Arkansas, a state of 2,855,290 citizens, is 21.3 billion dollars (2008). Enron’s stock losses alone could have paid for more than two years of all Arkansas state expenditures.

Now that we have an idea about the amount of money, let’s discuss the ramifications of that amount of money. Let us assume a particular citizen makes $30K a year. That citizen loses his job. His lack of income is a loss to the community, his state, and nation. He does not produce value and because he earns no money he cannot make purchases or invest. His unemployment damages the country although in a small way.

Let’s take a giant multinational corporation earning billions of dollars a year (at least on paper) and take it out of circulation. Does this affect the corporation’s community, state and nation? Yes. However, when you remove such a large economic unit you have somewhat wider effects. Not only is the corporation destroyed but it usually takes out a number of its suppliers and customers, thus destroying a number of other companies. Its workers join the ranks of the unemployed. Its bill will not be payed causing serious economic problems for scores of individuals and companies.

This is a much larger effect than the individual worker we discussed earlier. But there is more. Such a huge economic loss has long term effects as well. Investment in that part of the country is damaged. That means less money for business startups, business expansion, innovation or opportunity. Many workers become unemployed. This means they take jobs that would have been available to others and while unemployed cost the state resources that could have been used for many other things. For those that lose their pensions and investments, it can mean a total change in expectation and life style. For the country at large, it causes a growth of cynicism and a lack of trust. It damages the ties that bind society together.

And there is more. How will you feel the pain? You might say that you owned no shares, you did not work for the company, and they didn’t owe you any money as a supplier or anything else. Therefore, you did not suffer.

But you would be wrong.

You lose opportunity. The jobs that you could have gotten, the money that you could have made, the places you could have traveled to, the highways and grants and educational benefits you could have gotten, they are not there. And because you don’t know what opportunities disappeared when the corporation closed down, you are under the erroneous idea that you were not damaged.

You were.

The billions and trillions of dollars taken out of this country by corporate collapses like Enron and Worldcom, by the use of derivatives and sub-prime lending are real money. When that money, that value disappears, so do many of the possibilities of what you could have been, what you could have done, and what kind of future your community, your state and your country could have had.

That’s the reality of white collar crime. All the regular crime, you can figure out the effects, the dead people, the economic costs, the lost opportunities. You can count the bodies.  But corporate crime, white collar crime, it destroys the connecting fabric between individuals and simply eradicates possibilities making the world a smaller and more hostile place.

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