Who are white-collar criminals? And why are they people like us? Let’s start with the Hall of Infamy. Then we’ll look at some fascinating research on dishonesty and how it’s relevant to the law.
I recently blogged about the Australian Banking Royal Commission (long name: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry). As you might know, the Final Report recommendations didn’t name specific individuals who engaged in criminal conduct. This is of course, disappointing for the victims.
More equal than others
One issue that lurks in the backdrop of criminal law is the disparate treatment of different types of criminal behaviour.
Criminal law, as taught at law school, often concerns the baser crimes—such as murder and theft. Law schools on the whole (with some exceptions, such as here and here) spend little time on white-collar crime.
This is the kind of crime which attracts little attention because of its non-violent nature. Its abstraction from physical harm lulls most of us into apathy, though the real-world consequences can be destructive.
A financial fraud which eliminates a victim’s life savings, hidden behind an elaborate scheme, is no different (and arguably more contemptible) than daylight robbery. You could say that the mental element for criminal intent (mens rea or “guilty mind”) is more readily satisfied. This is particularly given the cerebral planning required to perpetuate such a fraud.
The Big Short
On a grander scale, white-collar crimes may be systemic. An example is the US subprime mortgage situation, which imploded into the 2008 Global Financial Crisis (GFC).
Investment bankers sliced and diced bad mortgages and repackaged them up with good debt. These digestible, “high quality” tradable financial instruments were also known as “Collateralized Debt Obligations”, or CDOs. Financial institutions and consumers happily traded these CDOs until the music stopped playing.
The GFC had implications beyond financial institutions, some who ultimately suffered the least due to US government bailouts. It led to widespread job losses and fears of global financial contagion. The extent of fraudulent and predatory mortgage lending evinced in one comic-tragic story. I recall reading one journalistic piece into the GFC, where it was discovered that a household cat was listed as a mortgage holder. Unfortunately, this source has receded into the troves of Internet news history and into my (no doubt fallible, but amused) memory.
“Those who do not learn history are doomed to repeat it.”—George Santayana
It appears that we’ve failed to learn from history. A recent news article notes the rise of a variant of CDOs, creatively dubbed “Collateralized Loan Obligations” or CLOs.
We have you pinned! (Not)
White-collar crime, let alone the criminals themselves, has a notoriously difficult-to-pin-down definition. It is unsurprising, given that white-collar crime (as we now know it) was not widespread across society for most of human history. For one, white-collar crime wasn’t exactly an option for those engaged in manual labour. This changed as societies industrialised and more people were relegated to jobs which involved higher levels of abstraction.
In 2017, the Australian Senate Economics References Committee published a report titled ‘Lifting the fear and suppressing the greed’: Penalties for white-collar crime and corporate and financial misconduct in Australia (Report).
It proposed the following definition of “white-collar crime”:
“While the term ‘white-collar crime’ remains contested, a useful definition is financially motivated non-violent crimes committed by businesses or individuals acting from a position of trust and authority. This basic definition is used in this report. Common examples of white-collar crime include fraud, bribery, insider trading, embezzlement, money laundering, forgery, cybercrime, identity theft and Ponzi schemes (although these offences do not always fit neatly into the ‘white-collar crime’ category).”
What is evident from the Report is that there is a patchwork of agencies and legislation which deal with white-collar crime.
Examples of Federal agencies involved in going after white-collar criminals:
- Australian Securities and Investments Commission (ASIC)
- Australian Taxation Office (ATO)
- Australian Federal Police (AFP)
- Commonwealth Director of Public Prosecutions (CDPP)
- Australian Competition and Consumer Commission (ACCC)
- Australian Financial Security Authority (AFSA)
- Attorney-General’s Department
The legislative instruments relevant for white-collar crime are many and complex. The following is a non-exhaustive list of Federal legislation, which set out criminal, civil and administrative penalties for white-collar crime:
- Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act)
- Criminal Code Act 1995 (Cth)
- Corporations Act 2001 (Cth)
- Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act)
- Proceeds of Crime Act 2002 (Cth)
- Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth)
- National Consumer Credit Protection Act 2009 (Cth) (NCCP Act)
Aside from the definitional and legislative complexities, the Report notes one important thing. It is notoriously difficult to successfully prosecute white-collar criminals, whether through the criminal or civil system. This is due to the difficulties in gathering evidence and the high evidentiary burden of proof.
For your inner nerd, if you’d like the legal explanation…
The criminal standard sets the bar at evidentiary proof “beyond reasonable doubt”. The civil standard, while typically lower as being “on the balance of probabilities”, is modified by the Briginshaw test in cases of white-collar crime.
The upshot of this is that regulators such as ASIC have been “required to effectively satisfy the standard of ‘beyond reasonable doubt’ when seeking to impose civil penalty orders because of the gravity of the allegations involved”.
On a random note, the Briginshaw test comes from the Australian High Court’s judgment in Briginshaw v Briginshaw (1938) 60 CLR 336. It concerned a petition for divorce on the ground of adultery. (Now what?! Guess it’s a form of dishonesty.)
The Australian Federal Police submitted that “[t]o date, there have not been any successful prosecutions under the corporate criminal responsibility provisions of the Criminal Code, where a body corporate has pleaded not guilty”. Now that’s concerning.
The Hall of Infamy
Let’s move right along down the Hall of Infamy to check out some exhibits of white-collar criminals from history. Let’s start with bad ol’ Ponzi.
Crime: Rob Peter to pay Paul
Amount: Approx. USD$20 million
Caught out in: 1920
Ponzi was a swindler and con artist of the first order. He was the forerunner of Bernie Madoff and gave the world his surname, in the form of “Ponzi scheme”.
Ponzi promised clients an incredible 50% return on their investments in 90 days, later reduced to 45 days. His money-making scheme was premised on arbitraging postal reply coupons—relying on Spanish and US currency conversion rates. In fact, no postal coupons ever changed hands. The only way Ponzi could get these incredible returns was by paying older investors out of the money that newer investors poured in.
Ponzi was so believable that he fooled swarths of people. This included 75% of Boston Police Force who invested and the Boston Post who initially wrote favourable articles about Ponzi.
As they say, if it’s too good to be true—it probably is.
Crime: Cooking the books
Amount: USD$74 billion in losses
Caught out in: 2001-2002
Lay founded Enron, a Texan energy company which was the darling of Wall Street bankers at one point. In 2001, Enron’s shares crashed from USD$95 to USD$1 within a period of three months. Enron’s dubious accounting practices and demise led to the collapse of its accounting firm, Arthur Anderson. Lay was convicted of fraud and conspiracy, but died before he could serve his sentence.
Crime: Keep it under the carpet!
Amount: €4.9 billion
Caught out in: 2008
Kerviel was a junior futures trader at the French investment bank, Société Générale. He falsified trades to conceal previous losses, which all unraveled in the wake of the GFC. Société Générale lost €4.9 billion unwinding the bad trades. Kerviel was jailed for about four months and released on probation to serve out the rest of his three-year sentence. In a strange twist, Kerviel later brought an unfair dismissal action in a French labour tribunal against Société Générale and won a €450,000 payout in 2016. Kerviel argued that Société Générale turned a blind eye to his actions and even encouraged them as long as his deals were profitable.
Crime: Faking it
Amount: USD$380 million
Caught out in: 2008
If you think that lawyers would never succumb to dishonesty, think again. Dreier, a “hotshot New York litigator” sold fake promissory notes to hedge funds. The whole scheme came crumbling to a halt after four years when investors realised the promissory notes were part of an elaborate fraud. Dreier was jailed for 20 years.
Crime: Full circle—Rob Peter to pay Paul
Amount: USD$65 billion
Caught out in: 2008
Madoff’s tricksy scheme dwarfed Ponzi’s own. To date, he is responsible for the largest Ponzi scheme in history at USD$65 billion. In late 2018, about ten years after Madoff’s arrest, the US Department of Justice dished out to victims $695m from a compensation fund. Madoff is currently serving his 150-year prison term.
Crime: That unicorn ain’t real
Amount: USD$9 billion to $0
Caught out in: 2016
Holmes was a Silicon Valley wunderkind who was pipped as the next Steve Jobs. The company she founded, Theranos, invented a blood testing machine to revolutionise traditional methods. Theranos was worth $9 billion in an initial fundraising round, which put Holmes’ net worth at $4.5 billion. Unfortunately, the Theranos machines never worked and most test results were falsified. Theranos collapsed after brilliant investigative journalism by John Carreyrou, described in his gripping book Bad Blood. It was said that Holmes didn’t just falsify blood test results, but also her authoritative baritone voice.
Crime: Stealing from the masses
Amount: USD$5 billion
Caught out in: N/A—still on the run
Low, dubbed the “Billion Dollar Whale” and described an “awkward” businessman/financier from Malaysia, threw extravagant parties on mega yachts. Those who rocked up at his 31st birthday party in 2012, including Leonardo DiCaprio and Britney Spears (the latter popping out of a birthday cake), never questioned the source of his wealth.
It turns out that Low was the mastermind of an investment scheme unwittingly bankrolled by Malaysian citizens, later known as the 1MDB scandal. It led to the 2018 downfall of the former Malaysian Prime Minister, Najib Razak.
Ironically, Low advised the Hollywood production company behind the movie, The Wolf of Wall Street. Low is currently MIA and on the run.
Christopher Hill and Lukas Kamay
Crime: Insider trading
Amount: <$20,000 and $8 million apiece
Caught out in: 2014
For some homegrown varieties, we have our very own insider traders. They are Australian Bureau of Statistics (ABS) analyst Christopher Hill and NAB banker Lukas Kamay. Hill provided Kamay with sensitive and unpublished ABS information. Kamay then used this information to trade on margin FX contracts on the foreign exchange derivatives market.
Unknown to Hill, Kamay went above and beyond their agreed $200,000 limit. He gave Hill less than $20,000 for his efforts, then continued trading on the information to make a gross profit of more than $8 million. Kamay bought a property featured in the popular TV series, The Block, but was caught before he could move in. It was strange case of immorality within criminality—like a matryoshka doll of crime—and proof of the saying “there’s no honour amongst thieves”.
Trial judge Hollingworth J described Kamay’s offending as “the worst instance of insider trading to have come before the courts in this country”. Kamay sought to appeal his sentence, which the Court of Appeal dismissed. Both sets of judgments provide fascinating insights into white-collar crime. I extract a couple of observations from Hollingworth J:
Insider trading is “not a victimless crime”: at -
“An insider trader uses inside information to gain an unfair advantage over other traders in the market; it is a form of cheating or fraud. Insider trading is a serious criminal offence, because it can undermine the integrity of markets, and diminish public confidence in the commercial world. The fact that margin FX contracts are an off-market derivative does not diminish the seriousness of the offending; it still has the potential to undermine confidence in the commercial world generally.
While it may not be possible to point to any particular loss made by an identifiable victim, insider trading is not a victimless crime. Apart from harm to the market and public confidence, in this case there were counter-parties to each of your trades; they themselves had to enter into other transactions to try to cover their own positions.
By its very nature, insider trading is particularly difficult to detect, investigate and prosecute.”
Pure greed a motivator: at 
“Unlike in some other cases involving insider trading, neither of you was driven by a gambling or other addiction, or some sort of financial pressure. There is no suggestion that any Verdins-type considerations apply so as to moderate your moral culpability. Although the corporate culture that existed in NAB’s foreign currency division when you, Mr Kamay, were working there may have been unduly focussed on making as much money as possible, that does not justify your behaviour. For both of you, your motivation for committing these offences was personal greed, pure and simple.”
Even the favoured can fall from grace: at -
“Mr Kamay, you were born in April 1988, and are now 26. Mr Hill, you were born in June 1989, and are now 25.
You both grew up in close-knit families, and were supported and encouraged in your upbringing. In your schooling, you both achieved academically and on the sporting fields, as well as in leadership roles.
You both did well at university, and went on to obtain good jobs after graduation. You were hard-working, focussed, driven, and eager to succeed. You have both been involved in voluntary activities in the community. You both had promising professional careers ahead of you, which you have almost certainly thrown away by your own actions.”
Narcissism at play: at 
“Mr Kamay, reports were also provided on your behalf, by Ms Pamela Matthews, a forensic psychologist, and Mr Clint Gurtman, a psychologist who has been treating you since your arrest. You are not suffering from depression, and have had no problems with alcohol or substance abuse. They describe how you felt driven to succeed in a highly competitive work environment, and to impress your family and friends. Both make mention of your displaying some symptoms of inflated self-esteem or narcissistic personality traits.”
White-collar criminals start off squeaky clean: at 
“Neither of you has ever been in trouble with the police before. That is not uncommon in the case of white collar offenders; indeed, it is often their previous good character that enables the white collar offender to be in a trusted position in the first place.”
One whale, loads of plankton
We now stroll out of the Hall of Infamy, which featured a bunch of crooks who cooked the books—or other things. You might now even think that all white-collar crime involves dollar signs of magnificent proportions.
Like the Big Pineapple, society is obsessed with extremes. In fact, extreme crimes (like the Big Pineapple?) such as murder are far less commonplace than you think. In his 2011 book, The Better Angels of Our Nature, Steven Pinker notes that murder and homicide rates have actually decreased over time.
On the other hand, we pay little attention to the little crimes or little bit of cheating under our noses. A fabulous documentary featuring Professor of Psychology and Behavioural Economics at Duke University, Dan Ariely, talks about how dishonesty is commonplace. Everyone has the capacity to cheat if given the opportunity and if the conditions are right. Check out the trailer below:
The reason for why we might cheat and still feel good about ourselves is due to what Ariely calls the “fudge factor”. This is the factor by which we can cheat by a little, but still tell ourselves that we’re still innately good people.
To prove this, Ariely ran a series of social experiments called the “matrix task”. In the control situation, participants were given 20 matrices. They were asked to find two numbers from each of the matrices which added up to 10.
This was a task which anyone could solve if given adequate time. However, the researchers only gave 5 minutes to each participant. When the allocated time was up, the researchers who would count up the number of correct answers. Participants received USD$0.50 per correct answer.
In a permutation of this experiment, participants had the opportunity to cheat. They could shred their paper in a shredding machine and tell the researchers how many correct answers they scored.
Nearly 40,000 people have participated in the matrix task. Ariely and his team found that about 70% of participants cheated slightly by claiming that they solved 6 matrices on average. This was on average 2 more matrices than the control group.
They also found that there were very few big cheaters who might claim that they scored correct answers on, say 19 out of 20 matrices. However, the total dollar amount that the little cheaters extracted out of the researchers was significantly greater than what the big cheaters had extracted. This led Ariely to conclude that the big cheaters were very rare, such that the overall economic impact is low. There are however tons of little cheaters, which in combination result much higher economic impact.
This has implications in the real world. Take the examples of insurance or tax fraud / misreporting (such as hiding cash payments). While the big cheaters make the news, the little cheaters play on the margins—but on the whole, deprive the tax system of much more.
There were also other amusing permutations of the matrix task, which you should check out in Ariely’s book, The (Honest) Truth About Dishonesty – How We Lie to Everyone: Especially Ourselves. Of course, dishonesty is not always a clear-cut case. For example, we all tell white lies to prevent others from feeling hurt. So there can be an “altruistic” aspect to this.
So, what are the lessons?
In our next post, we’ll take a closer look at the findings from researchers like Ariely and the lessons we can take from this.