The Golden Age of White Collar Crime

The Golden Age of White Collar Crime, by Michael Hobbes.

Over the last two years, nearly every institution of American life has taken on the unmistakable stench of moral rot. Corporate behemoths like Boeing and Wells Fargo have traded blue-chip credibility for white-collar callousness. Elite universities are selling admission spots to the highest Hollywood bidder. Silicon Valley unicorns have revealed themselves as long cons (Theranos), venture-capital cremation devices (Uber, WeWork) or straightforward comic book supervillains (Facebook). …

From the blackouts in California to the bloated bonuses on Wall Street to the entire biography of Jeffrey Epstein, it is impossible to look around the country and not get the feeling that elites are slowly looting it. …

And why wouldn’t they? The criminal justice system has given up all pretense that the crimes of the wealthy are worth taking seriously. In January 2019, white-collar prosecutions fell to their lowest level since researchers started tracking them in 1998. Even within the dwindling number of prosecutions, most are cases against low-level con artists and small-fry financial schemes. …

Country-club nepotism and Gilded Age avarice are nothing new in America, of course. But the rich are enjoying a golden age of impunity unprecedented in modern history. …

Elite deviance has become the dark matter of American life, the invisible force around which the country’s most powerful legal and political systems have set their orbit. … Epstein’s dinner party guest lists included Harvard professors, billionaire philanthropists and members of political dynasties in at least two countries. …

Tax evasion, to pick just one crime concentrated among the wealthy, already siphons up to 10,000 times more money out of the U.S. economy every year than bank robberies. In 2017, researchers estimated that fraud by America’s largest corporations cost Americans up to $360 billion annually between 1996 and 2004. That’s roughly two decades’ worth of street crime every single year. …

Legal enforcement for the elite and white collar crime has been wound back to the point where it’s just an ineffective show pony:

An entrenched, unfettered class of superpredators is wreaking havoc on American society. And in the process, they’ve broken the only systems capable of stopping them. …

After the Enron-led avalanche of corporate bankruptcies in the early 2000s, Congress gave the SEC enough funding to hire 200 new auditing staff. At the same time, however, lawmakers obligated the agency to review the filings of every publicly traded U.S. financial firm every three years — a mandate far larger than the agency’s new staffing levels. Then, after the financial crisis, it happened again: The Dodd-Frank act tasked the SEC with monitoring even more companies and trillions of new assets while increasing its enforcement staff by less than 10 percent.

This cycle has left America’s regulators with no choice but to engage in an increasingly desperate pantomime of white-collar law enforcement. On the outside, they report impressive performance statistics to avoid even more budget cuts. Behind the scenes, they’ve retreated to investigating only the defendants they know are guilty and the crimes they know where to find.

The primary beneficiaries of this shift are American elites. Rich people generate mountains of financial data. Millionaires can have over 100 bank accounts; billionaires’ tax returns run to 800 pages long. For people who earn most of their income from working (i.e. almost everyone), the IRS has an automatic system that compares individuals’ reports to the records submitted by their employers and banks. For the wealthy, who make much of their income from interest and investments, the agency has nothing to compare their reports against. The only way to tell if a rich person is cheating on their taxes is to sit down and go through them line by line.

“Let’s say you get a tip that some billionaire is hiding a bunch of money offshore and not paying taxes on it,” said Arthur VanDesande, who spent 25 years as a criminal investigator for the IRS. “And you manage to narrow the tax evasion down to 20 of his bank accounts. OK, now you have to prepare 20 subpoenas, get them signed by a judge and deliver them to the banks. But when you go to Bank of America, they say, ‘We don’t accept subpoenas at this location, you have to go to our authorized representative in Orlando.’ So then you go to Orlando and and you find out the money is linked to an offshore account. So then you have to write to the embassy…’” …

Contrary to the “Catch Me If You Can” myth, Albertson said, solving financial crimes is not a cat-and-mouse game between cunning investigators and slippery con artists. Most of the time it is simply the blunt application of resources to a series of unimaginably tedious tasks.

Even though auditing millionaires and billionaires is one of the most cost-effective government activities imaginable — an independent report estimated in 2014 that it yielded up to $4,545 in recovered revenue per hour of staff time — the IRS investigated the returns of just 3 percent of American millionaires in 2017.  …

Helen Richmond, a paralegal in a white-collar prosecutor’s office (that’s not her real name), said most of the defendants her office pursues are “either dumb or unlucky.” She’s worked on cases against money launderers who named stolen items on their wire transfers and fraudsters who sent emails with recipe-like details of their schemes. Criminals with even a scrap of sophistication, Richmond said, mostly avoid detection. …

The all-consuming yet unstated goal of every regulation agency in America: Make yourself look more powerful than you are. The best way to do this is to focus on the cases that will yield the maximum deterrence for the lowest cost. …

The IRS has explicitly instructed agents to prioritize cases likely to generate headlines. (Ever wonder why so many B-list celebrities get busted for tax evasion?). Federal investigators go after media punching bags like Martin Shkreli, Martha Stewart and Fyre Festival scammer Billy McFarland to make the public think criminal prosecutions are routine. They’re not: In a case-by-case analysis of the 216 alleged large-scale corporate frauds discovered between 1996 and 2004, researchers found that the media uncovered twice as many as the SEC. …

Richmond, the paralegal, tells me federal and state prosecutors have been playing hot potato with one of her cases for months because they can’t justify an expensive prosecution for a fraud that adds up to the low six digits. “It felt personal,’” [Lewis Winters, an SEC examiner] said. “Why did I spend three months examining this guy if enforcement just goes, ‘meh’?” …

The system is wide-open to being played by those who can afford enough lawyering:

Eventually, after a five-year investigation, Enron … former CEO Jeffrey Skilling … got 24 years in prison. At the time, it was one of the longest white-collar sentences in U.S. history. Prosecutors called it a victory. Skilling’s lawyers called it just the beginning. As soon as the nation turned its attention elsewhere, Skilling’s lawyers began quietly dismantling his sentence. They filed appeals objecting to the statutes used to convict him, the trial’s Houston location and the questionnaires filled out by potential jurors. In 2013, citing the “extraordinary resources” it had spent prosecuting and defending Skilling’s conviction, the Department of Justice agreed to cut ten years off Skilling’s sentence if he promised not to file any more appeals. He was released in February 2019 after serving less than half his original sentence. …

Nearly every high-profile corporate scandal has the same overlooked epilogue. The wealthy have always attempted to spend their way to lighter sentences, but in the last two decades, the American judicial system has become increasingly willing to let them. …

An overworked enforcement system loosens the rules to reduce its workload:

“We’ve seen a concerted effort to define deviance downward,” said Paul Leighton, a professor at Eastern Michigan University and the co-author of “The Rich Get Richer and the Poor Get Prison.” “We’ve made felonies into misdemeanors, misdemeanors into torts and torts into regulatory offenses.”

Think of a mechanic telling you that your perfectly functional transmission is busted, then telling you it will cost $2,000 to fix it. He hasn’t defrauded you exactly — he really will replace your transmission — but he used his position of authority to scam you into paying for something you didn’t need. …

But over the last three decades, the Supreme Court has taken the [law on honest services fraud] apart piece by piece. … From now on, the lying mechanic is breaking the law only if someone else is paying him to scam you. …

Wealthy defendants win cases by arguing that fraud statutes and insider trading rules are poorly written. They are. But so are the rest of the laws. (Numerous state anti-gang statutes, for example, define “gang” so imprecisely that they could apply to most sororities.) The only difference is that white-collar defendants have the ability to dispute every step of the process used to convict them — and a judicial system all too happy to oblige.

White color crime is too often only subtly different from normal activity:

The near-impossibility of establishing white-collar defendants’ motives combines with the high standard of reasonable doubt to create a paradox. Most Americans have a visceral aversion to greedy executives in general. Introduce them to a single banker and a specific crime, however, and their moral outrage often melts away. As Sam Buell, a Duke University law professor, told me: “Put people on a jury and they’ll say, ‘Gee, it seems like this guy was doing his job, so I don’t think it was a crime.’” …

And this is it, the Rosetta Stone … American law is incapable of prosecuting crimes in which elites use their legitimate power for nefarious ends.

“The way businesses harm people is the same way they interact with them normally,” Albertson said. Banks collect debts and foreclose on homes every day. Banks give out home loans every day. When they entice customers into unaffordable mortgages or foreclose on borrowers tricked into signing loans they can’t afford, the courts can’t tell the difference. …

Plausible deniability:

What self-checkout kiosks [at supermarkets] provide, researchers have found, is plausible deniability. If a security guard spots you slipping a pack of Tic-Tacs into your pocket, there’s no way to cast yourself as anything but a thief. If he catches you keying in a $10 bag of trail mix as a $2 bag of lentils, you can call it a mistake– oops, I must have typed in the wrong code! Perpetrators, especially middle-class white ones, know that if they get caught, everyone from the store manager to a small-claims court judge is likely to give them the benefit of the doubt. Self-checkouts turn shoppers into shoplifters by providing them with an opportunity to steal and a ready-made excuse to get away with it. …

Super-predators never admit guilt:

Larkin, the Manhattan prosecutor, said that when she used to prosecute murderers, they would strike a plea deal and then immediately open up — here’s why I stabbed him, here’s where I hid the knife. Once she switched to elite criminals, she was floored by their utter refusal to take responsibility. “They minimize and make excuses,” she said. “They believe in their own brilliance. They keep saying what they did wasn’t really wrong.” …

More surveillance is the only thing that works:

Criminologists have consistently found that increasing the likelihood of punishment works better than increasing its severity. …

“If you follow a company over its life cycle, studies have found that most of them engage in some kind of lawbreaking and almost all of them reoffend,” said Sally Simpson, a University of Maryland professor and the author of “Understanding White-Collar Crime: An Opportunity Perspective.” “The way you get deterrence is by showing them they’re being watched.”

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