Perpetrators and Offenses
(1)
Ernst & Young, Cologne, Germany
“I need a miracle.” This was the last Facebook status update sent to date by Kweku Adoboli to his 400 friends on September 13, 2011. The following night at 3:30 a.m. the handcuffs clicked shut around his wrists. The photo of the star banker with his boyish good looks in a lavender-colored pullover, which was handed over to the police in London by UBS, was seen around the world. The 31-year-old investment banker would be responsible at the final reckoning for losses of around US$2 billion at the major Swiss bank.
Yet it all started on a relatively small scale—at least by the standards of an investment bank. Adoboli, who had always dreamed of pursuing a successful investment banking career in the most glamorous financial centers of the world, suffered a US$400,000 trading loss in October 2008. He decided not to register the loss so as not to endanger his meteoric rise at UBS. Instead, he extended the settlement dates for his failed trading activities and thus managed to manipulate his own accounting department and internal controls—in order to buy himself time to cover the loss through other business transactions. His employers were under the impression that Adoboli was bringing in millions of dollars of profit, yet in reality he continued to incur heavy losses. His business transactions became increasingly reckless and more costly, while the illusion he created to try to conceal his manipulation became ever more complex and adventurous. That is until everything fell apart with a bang! It was all uncovered by an unrelenting accountant in the back office, as Adoboli got himself embroiled deeper and deeper in a series of contradictions. The miracle Adoboli so yearned for never materialized and he was found guilty of fraud and sentenced to 7 years in prison in November 2012.
The Adoboli case reveals—in a very vivid and topical manner—a great deal about the nature of white-collar crime, its players, and its consequences, all of which will be presented and reflected upon in this chapter. It is not uncommon for major scandals to start off with small offenses, in whose genesis the personality profile of the perpetrator and his/her motives play a decisive role. Understanding this role and being able to apply the knowledge to the investigation of fraud cases, as well as to all preventative measures, is a fundamental skill required by all those dealing with white-collar crime.
2.1 White-Collar Crime: A Practical Definition
What do we mean precisely when we talk of white-collar crime? The specialist literature and those practically involved in this area are very divided on the matter. The definitions and key features of this term become blurred depending on the relevant academic discipline or the jurisdiction of the relevant authority. Therefore, there is no generally accepted definition upon which all those involved in social science, political science, criminology, and law enforcement can agree (see Heissner 2001, p. 236 ff.). Does white-collar crime mean crime committed in the economy, crime committed by the economy, or crime committed against the economy? And does white-collar crime only deal with actions that can be penalized according to the statute book, or also with other socially damaging behavior?
The sheer complexity of this phenomenon (see Göppinger 1997, p. 541) and the broad range of possible offenses make it difficult to generalize on this subject. Because even if the term white-collar crime itself were clearly defined, there is still no clear differentiation between this term and equally relevant phenomena, such as corruption and antitrust crimes, that—at least in a judicial sense—form their own individual categories.
For the sake of clarity and practical application, this book will refrain from providing an overly theoretical derivation of the term at this point.1 Instead, a practical working definition will be derived and explained, which will cover everything that managers in the world of business and, by implication, a forensic audit and crime enforcement authorities come across in their work. This method will help to develop a holistic overview of the subject.
2.1.1 Different Aspects for a Comprehensive Understanding of White-Collar Crime
The term white-collar crime can be highly misleading. This is simply because it is so complex and is not uniformly applied as previously mentioned above. The term is eagerly used to describe all manner of different things, from one context to the next, all of which could be encapsulated by the phrase “actions damaging to business.” To be sufficiently prepared to tackle liability issues and the debate surrounding them, it makes good sense to delve a little deeper into the material in order to gain an overview of which “actions damaging to business” are designated as legal offenses by lawyers, auditors, district attorneys, and the police, and what is actually meant when it comes to white-collar crime or corruption.
It is difficult to develop a comprehensive understanding of the phenomenon of white-collar crime due to the existence of such an enormous range of different offenses—all with countless gradations and variations. Depending on the definition, this can start with interns stealing pens and printer paper out of the office supplies cupboard and definitively ends with complex manipulation of balance sheets and unauthorized market speculation as in the cases of Adoboli and Kerviel. It already becomes clear at this point that some offenses are committed at a superficial level for the company—meaning they initially benefit the company—for example, in some cases of corruption. On the other hand, there are also white-collar crimes that are clearly directed against the company, such as breaches of trust or embezzlement. Because there is no legal definition for the term white-collar crime in Germany, the Federal Criminal Police Office (Bundeskriminalamt—BKA) refers to the purely criminal definition of white-collar crime found in Article 74c of the German Code on Court Constitution (Gerichtsverfassungsgesetz—GVG).2 This stipulates which court is responsible for handling which offenses and defines practically everything that crime enforcement authorities understand to be white-collar crime in concrete terms. This includes criminal offenses:
1.
According to the Patent Act (Patentgesetz), the Industrial Design Act (Gebrauchsmustergesetz), the Semiconductor Protection Act (Halbleiterschutzgesetz), the Plant Variety Protection Law (Sortenschutzgesetz), the Trade Mark law (Markengesetz—MarkenG), the Design Act (Geschmacksmustergesetz), the Copyright Act (Urheberrechtsgesetz—UrhG), the Law Against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb—UWG), the Stock Corporation Law (Aktiengesetz—AktG), the Company Disclosure Law (Gesetz über die Rechnungslegung von bestimmten Unternehmen und Konzernen), Limited Liability Companies Act (Gesetz, betreffend die Gesellschaften mit beschränkter Haftung), the German Commercial Code (Handelsgesetzbuch—HGB), the Law for the Implementation of the EEC Regulation on the European Economic Interest Grouping (Gesetz zur Ausführung der EWG-Verordnung über die Europäische wirtschaftliche Interessenvereinigung), the German Cooperatives Act (Genossenschaftsgesetz), and the Reorganization of Companies Act (Umwandlungsgesetz).
2.
According to the laws dealing with the banking, securities, stock market, and credit systems, as well as those according to the Insurance Supervision Act (Versicherungsaufsichtsgesetz) and the German Securities Trading Act (Wertpapierhandelsgesetz—WpHG).
3.
According to the Economic Offenses Act (Wirtschaftsstrafgesetz) 1954, the Foreign Trade Act (Außenwirtschaftsgesetz), the Foreign Exchange Control Laws (Devisenbewirtschaftungsgesetzen) and fiscal monopoly, tax, and customs law, even insofar as such penal provisions according to other laws are applicable; this is not true if the same action represents a criminal offense according to the Narcotics Act (Betäubungsmittelgesetz), nor a tax offense related to motor vehicle tax.
4.
According to the German Wine Act (Weingesetz) and food law.
5.
Classified as computer fraud, subsidy fraud, investment fraud, credit fraud, bankruptcy offenses, fraudulent preference and fraudulent preference of a debtor, and anticompetitive agreements for invitations to tender, as well as corruption and bribery in business transactions.
6.
Classified as fraud, a breach of trust, profiteering, the granting of an undue advantage, and bribery, insofar as special knowledge of economic life is required to assess the case (Article 74c GVG, see Heissner 2001, p. 28 ff.).
Statistics on offenses and responsibilities of each court as defined in Article 74c of GVG are published, for example, in the Police Crime Statistics (Polizeilichen Kriminalstatistik—PKS) and yearly in the Situation Report on White-Collar Crime (“Bundeslagebild Wirtschaftskriminalität”) by the BKA. The fact that the descriptions of these offenses, as well as the case numbers, should be treated with caution from a practical point of view will be dealt with briefly when we come to examine the actual damage caused by white-collar crime later.
A critical examination soon reveals that the term white-collar crime as it is formally used in Germany is not all-encompassing. Anybody who only counts those offenses that are listed from a legal standpoint under the heading of “white-collar crime” will then be likely to overlook the manipulation of balance sheets, corruption of officials, industrial espionage, or money laundering.
To form a practical overview of all relevant offenses, it is necessary to broaden our view. Therefore, this chapter will initially define in detail what corporate leaders, management boards, managers, and supervisory boards should understand under the term white-collar crime when it is discussed in this book. This means that the following sections will examine offenses that cause damage in companies and destroy assets—and for which company executives are responsible, or even liable, for detecting, solving, and preventing.
This will then be supplemented by offenses in the areas of competition and antitrust law, which are being more strictly regulated on an international and supranational scale, plus the whole area of corruption: from illegally accepting an advantage through bribery payments to the manipulation of invitations to tender and price fixing. Although these are also included, to some extent, in Article 74c of GVG, they almost form their own type of offense due to the large number of legal aspects included in international regulations. This is also valid, to a similar extent, for the areas of IT security, data protection, industrial espionage, and so-called “cybercrime.”
The term white-collar crime takes on another dimension when we examine what is today called “noncompliance”—even if this area already implicitly includes special offenses related to corruption.
A really clear distinction between white-collar crime in its strictest sense and noncompliance is, however, essential to be able to form a comprehensive understanding. White-collar crimes such as fraud or manipulation are, in general, directly committed against the company. A bookkeeper who sets up imaginary employees in order to transfer salaries to a private bank account is directly costing the company money because capital is being drained away.
In contrast, many cases of noncompliance appear at first glance to be beneficial to the company. For example, if a company gains a competitive advantage by bribing officials or decision-makers in relation to invitations to tender, then it is certainly not detrimental to the company’s short-term success—quite the opposite. In fact, it is possible to trace the success stories of whole companies back to a corruption or antitrust offense. Even the types of offenses that do not directly cause damage within the company need to be taken into account to prevent value destruction in the long term.
The Siemens case is likely to mark a significant turning point when it comes to international law enforcement in the area of corruption. The times of openly practiced and silently tolerated corruption are now truly a thing of the past. These types of antitrust offenses are now consistently and professionally investigated and represent a threat to the very existence of even larger companies if the criminal investigations are carried out in a correspondingly committed manner. For example, if profits are disgorged or the offenses result in sanctions such as companies being blacklisted.
2.1.2 Alternative Term: “Deviant Behavior”
Experience working both as a police detective and in forensic auditing has shown that it is, however, necessary to critically evaluate the use of the umbrella term white-collar crime to describe all of the listed offenses. This is because it is not always appropriate nor does it properly reflect reality. The term white-collar crime is also simply too harsh in many cases at a purely human level. Those who seek to understand this phenomenon and its manifestations must be capable of recognizing the people behind the phenomenon and understanding their motives. It is certainly understandable that people need to tell it like it is in order to discourage this type of behavior and to develop awareness of the problem. These crimes are not trivial offenses but in many cases criminal acts—even if the perpetrators aren’t wearing balaclavas.
Yet there is also a danger here of overgeneralizing. Again and again we see cases where employees wind up in difficult situations due to personal pressures, the criminal involvement of third parties, or simply due to ignorance—only to then be punished as criminals. Even in the Adoboli case described earlier, it would be a mistake to view the perpetrator as a lone operator driven simply by greed. From a criminalistics point of view, perpetrators are more often products of their environment than we or our own prejudices would like to admit.
An alternative, which could certainly be used as a synonym in this book, is offered by the term “deviant behavior”—a more encompassing description of white-collar crime, corruption, fraud, and all other imaginable cases of infringements against the existing regulations in the sense of noncompliance. The phrase “deviant behavior” originally stems from the field of sociology and has gradually found its way into the area of criminology (see Dollinger and Raithel 2006, as well as Göppinger and von Bock 2008). In principle, the term describes everything that is not considered adequate or desirable from a business or social standpoint. This does not necessarily mean, however, that they are criminal offenses.
In summary, the term “deviant behavior” is used in this book to describe everything that causes damage from a company perspective—behavior that a forensic audit is designed to detect and prevent. In many cases, this is connected to the liability of supervisory persons in terms of their obligation to protect against and detect this behavior in accordance with German and international legislation, as already explained in Chap. 1.
2.1.3 Overview of the Relevant Offenses Included Under “Deviant Behavior”
Any attempt to systemize “deviant behavior” is thus difficult due to the many different forms in which it manifests itself. Nevertheless, a number of different approaches can be found in relevant literature that are dedicated to precisely this task. This book will initially focus on a commonly used approach found in the Anglo-American world for the classification of white-collar crime: the so-called “Fraud Tree” (see ACFE online, for example http://www.acfe.com/fraud-tree.aspx) from the Association of Certified Fraud Examiners (ACFE 2013). It divides “deviant behavior” into three main categories from an economic perspective, representing them and their relationship to one another in the form of a family tree. The main categories in the Fraud Tree are Misappropriation of Assets, Financial Statement Fraud, and Corruption. This approach already deviates from the strictly judicial definition of white-collar crime to view the subject much more from an economic perspective.
2.1.3.1 Elements of the Fraud Tree: Misappropriation of Assets
The assets of a company can generally be damaged in two different ways. One way is as a result of theft or misuse of material goods: such as a warehouse manager who falsifies stocktaking sheets in order to sell goods to criminals on the black market. However, it could also be a manager using the company car to drive to Portugal for a family holiday. What is true for “physical” assets is naturally also true for liquid assets.
In its simplest form, this involves the theft of cash. However, money can also be skimmed off through the manipulation of sales revenues, receivables, or credit notes. In addition, the misappropriation of assets through liquid means can also be achieved in the form of fabricated expenditure. For example, this could be the payment of a fictitious employee, or alternatively, fake incoming invoices, false refunds, or forged checks (Fig. 2.1).
Fig. 2.1
The ACFE fraud tree: misappropriation of assets
2.1.3.2 Elements of the Fraud Tree: Financial Statement Fraud
Financial statement fraud is a special form of the misappropriation of assets and covers six different types of crime. These include misleading statements such as invoicing excessive amounts, crimes in the area of company valuations such as the overstatement of assets or the understatement of liabilities, incorrect reporting period accrual such as booking profits before they are realized, the concealment of expenses and liabilities, and the booking of fictitious revenues, for example, from fake customers or bogus companies (see Hofmann 2008, p. 79 ff.).
From the perspective of criminal law, most of the crimes involved in the misappropriation of assets and financial statement fraud are simply classified as fraud. Fraud in accordance with the definition in Article 263 of the German Criminal Code (Strafgesetzbuch—StGB) always includes deception or fraudulent representation—completely characteristic elements of white-collar crime. This is also the reason why fraud makes up the largest proportion of cases dealing with white-collar crime (see Bundeskriminalamt, Situation Report on White-Collar Crime 2010).
While the perpetrator who plays the active role in these types of manipulation is generally charged with fraud, the responsible supervisory persons such as management boards or supervisory boards must answer the charge of a “breach of trust.” In accordance with Article 266 of StGB, a breach of trust is classified as a so-called “special crime” that only affects those people that have a “fiduciary duty to protect third-party financial interests” at the time of the crime (see BGHSt 24, 387 in Hlavica et al. 2011, p. 303). Put simply, if a manager, management board, or supervisory board at an incorporated company permits the share capital to be diverted, endangered, wiped out, or used for criminal activities then they are committing a criminal act. A prison sentence of up to 10 years can be handed out in particularly serious cases (Fig. 2.2).
Fig. 2.2
The ACFE fraud tree: financial statement fraud
2.1.3.3 Elements of the Fraud Tree: Corruption
Corruption is divided into two branches in the Fraud Tree: bribery/corruptibility and conflicts of interest. Bribery can take the form of bid rigging or kickbacks—so-called “hidden provisions”—meaning the payment or receipt of bribes. Following the conclusion of a business transaction, this involves a proportion of the amount paid being refunded to one of the parties involved in the transaction.
A conflict of interests can develop quicker than one would initially think. If the purchaser at one company, for example, has a good acquaintance in the sales department at another company and they confide in their acquaintance that they depend on the conclusion of the transaction for personal financial reasons, the purchaser already has a conflict of interest, which could possibly lead to the purchase of raw materials or other products at overinflated prices. In this way, a conflict of interest can thus develop in both purchasing and sales.
Just as with the term white-collar crime, there is also no legal definition for the term “corruption” in German criminal law. Depending on who is bribing whom or who is providing whom with what advantage, different paragraphs of criminal law are valid (Fig. 2.3).
Fig. 2.3
The ACFE fraud tree: corruption
Specialist Information: Elements of Corruption
Bribery of voters or members of parliament according to Articles 108b and 108e of StGB
Commercial bribery according to Articles 299 to 302 of StGB
Bribery of public officials according to Articles 331 to 335 of StGB
Other relevant legislation includes the Law on Combating International Corruption (Gesetz zur Bekämpfung der internationalen Bestechung—IntBestG), the EU Bribery Act (EUBestG), and, depending on the nature of the business, the UK Bribery Act and the Foreign Corruption Practices Act (USA).
This may at first appear to be a comprehensive framework of legislation. Nevertheless, it is not least the businesses themselves who continuously complain that German corruption legislation is patchy and fear that it lacks international credibility. This is emphasized by the fact that Germany has not ratified the UN Convention against corruption to this day.
The bone of contention in the past was the repeated bribery of public officials, which in practice is only punishable in advance of parliamentary elections. Many other forms of corruption are thus not covered: for example, exerting influence on the issuing of public contracts and corresponding “remuneration” in the form of favors or gifts; or one classic form of corruption: the offer of a free vacation on a Spanish finca.
The three main categories of the Fraud Tree from the ACFE are concentrated on corruption and fraud in the area of assets and financial statements. Alongside these crimes there are, however, other special forms of white-collar crime that management boards and supervisory boards need to take into account. Due to their topical nature and liability-related relevance, the following sections will take a particularly detailed look at money laundering and tax and balance sheet fraud—before the list of crimes is complete.
2.1.3.4 Money Laundering
Money laundering is a term that should be familiar to everyone from Mafia films. In general, gangsters have the problem of channeling their illegally acquired money into the general economic cycle while attracting as little attention as possible. Any other solution would be too suspicious and merely provide authorities with needless opportunities for criminal investigations. Therefore, money laundering describes nothing more than the process of integrating illegally acquired money into the legal financial system under some sort of pretense.
This might sound a little far-fetched at first, but banks in particular can experience massive problems with money laundering as a result of their extremely complicated and convoluted financial transaction systems. These mean it is not always clear at first glance which money is illegal and must be laundered. However, the consequences of overly lax controls can prove disastrous: In December 2012, the major British bank HSBC paid a US$1.9 billion fine because they had been found guilty of facilitating money laundering through dubious transactions.
Naturally, there are not many bankers whose intention at the very beginning is to break arms embargos, launder drug money, or finance terrorism through their transactions. Yet the banker and his superiors must nevertheless fulfill comprehensive international monitoring and reporting obligations using so-called “legitimization and identification checks.”
In Germany, money laundering is a crime according to Article 261 of StGB, while it is regulated on an international stage by a diverse range of laws, regulations, and directives from the EU, UN, OECD, and OSCE.
2.1.3.5 Tax and Balance Sheet Fraud
Tax offenses and corresponding balance sheet fraud are extremely typical examples of white-collar crime that remain hidden for a long time yet cause huge damage over the years.
However, as soon as they are discovered, they quickly attract massive public attention and result in draconian punishments. One reason for this is that both tax fraud investigators and criminal investigators are becoming ever-more specialized and now relentlessly pursue these types of crime.
One recent example saw the business premises of the Deutsche Bank turned upside down by 500 (!) police officers, officials from the tax fraud investigation office, and the BKA during a raid that resulted in the arrest of five employees in the middle of December 2012. Their suspicion was sales tax fraud, tax evasion, money laundering, and obstruction of justice relating to the trade of CO2 emission certificates. The bank was accused of utilizing the so-called sales tax merry-go-round method in which tax was refunded by the state in advance to bogus companies but never paid back.
In a legal sense, German balance sheet and tax law is probably the most complex in the world. Related crimes are listed according to Articles 369 to 384 of the General Fiscal Code (Abgabenordnung—AO) between tax offenses and tax infringements.
Specialist Information: Elements of Balance Sheet and Tax Law (Excerpt)
Tax evasion according to Article 370 of AO
Infringement of the tariff laws (professional, violent, and gang-based smuggling) according to Article 372 of AO
Illegal import or export of objects subject to duty according to Article 373 of AO
Handling the profits of tax evasion according to Article 374 of AO
Counterfeiting of money or tokens according to Articles 148 to 149 of StGB
Incorrect or incomplete statements according to Article 370 of AO can relate to tax declarations for income tax and sales tax, but also to notifications and corrections according to Article 153 of AO, or tax benefits such as deferments according to Article 222 of AO (see Harz et al. 2013, p. 83).
Tax infringements usually result in fines in accordance with Article 377 of AO.
These infringements include frivolous tax evasion (Article 378 of AO), minor tax fraud (Article 379 of AO), and illegally obtaining entitlements to tax refunds or tax rebates (Article 383 of AO).
Balance sheet crimes are covered by Article 331 No. 1 of HGB, which sanctions false statements in interim reports, annual reports, statements of affairs, or opening balance sheets with fines and terms of imprisonment of up to 3 years—all members of the corporate bodies authorized to represent the company who were aware of the incorrect statements or approved them are held criminally responsible.
2.1.3.6 Other Relevant Offenses and How They Are Dealt with Under Criminal Law
Even if the already described offenses of fraud, corruption, and manipulation make up the majority of white-collar crimes in Germany, it is important not to forget other relevant offenses and how they are dealt with under criminal law. Depending on the industry sector or the focus of the company, these offenses should be included in the risk analysis to a greater or lesser extent.
This includes, for example, offenses dealing with insolvency. The hectic and emotional nature of an insolvency process provides fertile ground for practically every form of white-collar crime. This ranges from straightforward fraudulent actions in accordance with Article 262 of StGB through to serious crime.
Specialist Information: Elements of Insolvency Offenses (Excerpt)
Withholding social security payments according to Article 267 of StGB
Forging documents according to Article 266a of StGB
Delaying insolvency proceedings according to Article 15a of the German Insolvency Act (Insolvenzordnung—InsO)
Bankruptcy according to Article 283 of StGB
Naturally, it is not necessarily illegal per se for a company to “go bust” as a result of commercial factors. However, bankruptcy becomes a crime if the company’s inability to pay is brought about either through negligence or intentional actions.
A comparatively new discipline in the area of white-collar crime is Internet and computer crime, which the BKA futuristically names “cybercrime” in its overview of the subject. This includes, for example, forming fraudulent networks or “phishing” sites on the Internet, and manipulating or sabotaging computers, which is still covered under the crime of willful damage to property (Article 303 of StGB). As a reaction to the increasing danger posed by computer crime, the legislators have supplemented the legal regulations with Article 303a of StGB “Data manipulation” and Article 303b of StGB “Computer sabotage” (see Schönke et al. 2010, StGB, Article 303a in Harz et al. 2013, p. 168).
The situation becomes even more fascinating when it comes to product piracy and the infringement of intellectual property (Articles 106, 107, and 108 of UrhG, as well as the threat of punishment in accordance with Article 143 of MarkenG) in the unauthorized disclosure and interception of data.
Today, the digital nature of companies and their data has inevitably heralded a new chapter in the history of economic and industrial espionage, the defense against which falls increasingly under the responsibility of top managers—regulated in Germany in antitrust law according to Articles 17 ff. of UWG and supplemented since 1997 in Articles 298 ff. of StGB.
As a result of the major loss of assets in the cases surrounding Jerome Kerviel, Nick Leeson, or Kweku Adoboli, attention has now been focused even more on unauthorized trading and insider trading. While insider trading is defined in Germany according to various articles of WpHG and is punishable with a prison sentence of up to 5 years, the area of market speculation is stuck in a grey zone with respect to criminal law. American legislators and judicature handle insider trading, in particular, much more rigidly: in October 2011, an American federal court sentenced Raj Rajaratnam, head of the unfailingly and mysteriously well-performing hedge fund Galleon, to an 11 year jail sentence and a fine of over US$60 million for insider trading and conspiracy. It turned out that the stock market guru was extremely well connected among the high circles of the American economy—even receiving exclusive information seconds after the conclusion of important supervisory board or management board meetings. In a subsequent civil process, the SEC issued Rajaratnam with a claim for damages amounting to US$93 million.5
In the area of unauthorized speculation, it is less the criminal dimension and more the liability issues that face management boards and supervisory boards, together with the very high damages awarded on average in these cases, which has created the sense of urgency for preventing unauthorized speculations in advance. The technical and forensic capabilities for preventing this behavior will be specifically examined in Chap. 4.