V. Types of White-Collar Crime
White-collar crime comes in a variety of forms and can be found in every industry, profession, and occupation. In this section, five major forms of white-collar crime are defined and described: antitrust violations, securities violations, consumer fraud, health care fraud, and environmental offenses.
A. Antitrust Violations
Antitrust violation can be divided into two broad groups: restrictive trade agreements, and monopolies or monopolistic practices. Restrictive trade agreements involve an illegal agreement or understanding between competitors in an industry to restrict how the industry works. Two examples of restrictive trade agreements are price fixing and market sharing or division. Price fixing refers to agreements between competitors to set prices at a certain level. For example, if milk producers get together and agree among themselves to charge schools a set price for the milk used in school lunch programs, that is price fixing. Market sharing occurs when competitors get together and divide up an area, so that only one of them operates in any one area at a time. For example, two paving contractors might divide up a town so that one takes the east side and the other the west side of town. These sorts of agreements are illegal because they restrain trade. In these examples, the prices for these goods and services (milk and paving) are not being set by open competition in the marketplace, as they should be in a free market economy. Rather, prices are being set by collusion between or among competitors.
Monopolies and monopolistic practices involve unfair attempts to corner a market or to drive out competitors from a marketplace. A monopoly is said to exist if one company controls an entire market, but a company can have monopolistic control even though it has competitors if it controls a large enough share of a market. Microsoft’s Windows operating system, for example, was declared a monopoly even though there are other operating systems available. The other systems have such a small market share and Windows has such a large share that it effectively controls the market.
There are two main techniques of monopolistic practices. The first is to use predatory pricing, which occurs when a company sets a price for its products or services that is economically unfeasible in order to drive competitors out of business. A second technique is for a company to pressure or control other companies that supply or deal with competitors so as to put them at a competitive disadvantage. Microsoft was accused of doing this with computer manufactures. It forced computer manufactures who wanted to preload their machines with the Windows operating system to agree not to install software from some rival companies when selling computers to the public. In effect, this destroyed the market for rival software companies.
B. Securities Violations
A security is evidence of ownership, creditorship, or debt. It is a piece of paper, or an account number, or something that indicates that someone has a financial interest or stake in an economic undertaking. For example, stocks, bonds, shares in a mutual fund, promissory notes, and U.S. government savings bonds are all securities. Publicly traded securities are bought and sold on exchanges, such as the New York Stock Exchange.
There are five major types of security offenses. Misrepresentation involves lying about the value or condition of a security. Stock manipulation occurs when an individual or a group of individuals attempts to artificially manipulate the price of a security. Misappropriation is an offense committed by brokers or other financial advisors who take money that their clients have given them to invest and misappropriate it for their own use. Insider trading is perhaps the most publicized security offense. It arises when people trade on the basis of inside, nonpublic information. It is illegal for insiders to buy or sell stock on the basis of information that is not available to the public. Finally, in an investment scheme, the perpetrator tricks people into investing money in an undertaking or security by falsely promising investors that they will receive a high rate of return on their investment. In reality, the undertaking has little or no chance of paying off, and the perpetrator simply makes off with the investors’ money.
C. Consumer Fraud
Consumer fraud is one of the most common forms of white-collar crime. It involves the use of deceit or deception in the marketing and selling of goods or services. This offense usually involves the deliberate use of false, deceptive, or misleading statements about the cost, quality, or effectiveness of a product or service. Consumer fraud offenders are drawn from all types of businesses and represent a continuum of size and complexity. Fraud against consumers has been perpetrated by offenders ranging from fly-by-night con artists to major multinational corporations, such as Sears and K-Mart. Fraud also occurs in businesses that fall between these two extremes, including local “legitimate” businesses that may on occasion resort to fraud in order to make extra profit or to avoid going out of business.
The following are seven of the more common forms of consumer fraud:
- Mislabeled products and misleading advertising. Many consumer products come with labels that purport to tell about the ingredients in a product or about its performance or efficiency—for example, prepared foods, computers, water heaters, furnaces, and a host of other products. One way to sell cheap or shoddy products is to put inaccurate or misleading information on the label to make them seem better or more attractive than they really are. Misleading advertising is another way to influence buying decisions. For example, food manufacturers may make questionable claims about the nutritional or heath value of their products.
- Real estate fraud. Real estate fraud involves lying or being deceptive about the condition of real property, things such as land, houses, and buildings.
- Free prize scams. In these types of scams, people are told that they have won a valuable free prize, but in order to collect it they must send in money or make a phone call. The money that is sent in will greatly exceed the value of the prize, or the victim will be charged for the phone call at a rate that greatly exceeds the value of the prize.
- Bait-and-switch advertising. Popular with “legitimate” retail businesses, this fraud involves advertising some well-known product, such as a TV or major appliance, at a ridiculously low price. However, when consumers come to the store, they are told that the item is sold out or temporarily out of stock and then are steered toward other more expensive products that are available.
- Repair frauds. Repair frauds typically involve big-ticket items such as homes, automobiles, or major appliances (dishwashers, washing machines, furnaces, and the like). The fraud involves either doing unnecessary repairs or doing substandard work and then charging the victim full price.
- Charity and advocacy frauds. Charity frauds appeal to the emotions. The victims think they are donating money or goods to help a worthy cause, when in reality the money is kept by those who collected it. Advocacy frauds are slightly different in that the offender promises to advocate for the victim with some other governmental body, such as the U.S. Congress or a state legislature. The offender promises to see that the victim’s interests are protected on Capitol Hill or at the state capitol. However, in reality, like charity frauds, little or none of the money is actually used to promote these ends. Rather, it finances the lifestyles of the so-called advocates.
- Advance-fee swindles. Anytime someone is asked to pay in advance for a service or product, he or she is vulnerable to an advance-fee swindle. Typically, in these swindles someone promises to do something for the victim, but the offender asks the victim to pay first and then the offender never delivers on the promise. Often, the promised service is one where it may be difficult to confirm one way or the other whether the service was provided. For example, advance-fee swindles may involve such services as finding housing, or educational loans, or employment. In these cases, the swindler promises to help the victim find an apartment, or a college loan, or a new job in return for a fee. The victim pays the fee, but does not get what he or she wanted in return. The swindler claims to be working for the victims but really is just taking their money.
D. Health Care Fraud
Health care fraud involves fraud against health care insurers and government programs such as Medicare and Medicaid. These two programs are particularly ripe for fraud because of their size and complexity. They process literally billions of dollars worth of claims annually.Although the exact cost of health care fraud is unknown, it is estimated to be in the hundreds of billions of dollars per year. Health care fraud can be committed by any person or organization in the health care industry who is involved with the provision of health care services to patients, including physicians, mental health professionals, hospitals, nursing homes, equipment suppliers, and pharmaceutical companies, as well as many others. Because physicians deal most directly with patients, their involvement in fraud is particularly serious. The following are three common forms of health care fraud involving physicians:
- Unnecessary procedures. Because most people know very little about their bodies and the various problems they can have, they rely on the expertise of physicians. Physicians are supposed to provide treatment based on their best assessment of the patient’s medical needs. Some physicians, however, make decisions based not on the medical needs of patients but rather on their financial goals. Physicians may recommend that patients undergo unnecessary procedures, ranging from relatively simple but unnecessary tests to life-threatening surgery. So-called “Medicaid mills” make a business out of providing unnecessary procedures. These operations often are run in low-income neighborhoods. A group of unscrupulous doctors sets up a shop and recruits low-income patients—drug addicts, alcoholics, homeless people, and so forth. The patients are paid a small fee, are run through a battery of unnecessary tests, and then the federal government is billed for the cost of the tests.
- Fee splitting. Most general practitioners cannot handle serious illnesses or medical conditions. When confronted with these types of cases, they often refer patients to specialists. To the extent that referrals are made on the basis of the physician’s medical judgment, that is appropriate. But sometimes, physicians make referrals because they have a financial arrangement with a particular specialist. In return for referring patients to the specialist, the general practitioner gets a kickback in the form of a cut of the specialist’s fee.
- Fraudulent billing. Probably the most common type of fraud is fraudulent billing. This can be accomplished in a variety of different ways, but basically it involves submitting claims for reimbursement for services that were never really provided. For example, a physician may submit a claim saying that he or she performed some medical service for a patient when the service really was not provided, or when the service that was provided was somehow less than the physician is claiming.
E. Environmental Crime
There is no clear, widely accepted definition of the term environmental crime. Implicitly, it is defined as any violations of local, state, or federal “environmental laws.” Environmental laws seek to protect the quality of the air, water, and soil by regulating both harmful additions to the environment (water, air, and soil pollution) and harmful subtractions from the environment (destruction of habitats).
Environmental crime comes in a variety of forms and sizes. Offenders may be homeowners who dump leftover paint into a city sewer system in violation of local ordinances, or they may be multinational corporations that manufacture, ship, and dispose of hazardous materials under conditions that are criminally negligent and morally outrageous.
Because different types of environmental crimes are associated with different industries and businesses, the nature of environmental crime in a community tends to reflect local economic activity. Certain types of environmental crime problems, however, are widespread. A study of local law enforcement responses to environmental crime concluded that illegal waste tire disposal, improper disposal of furniture stripping and electroplating waste, used motor oil disposal, and hazardous wastes dumped into streams and rivers, are found in nearly all communities (Rosoff, Pontell, &Tillman, 2006). Along with these generic forms of environmental crime, some communities suffer unique problems as a result of their particular mix of local industries and businesses. For example, in some rural communities, most of the local environmental problems may be caused by one particular business, such as a tannery or textile manufacturer. The states of Maine and New Jersey both have problems with illegal disposal of hazardous waste, but the type of waste is specific to each state. In Maine, waste cases tend to involve the textile, wood, and fishing industries. In New Jersey, on the other hand, they involve the chemical and petrochemical industries.
In a strictly legal sense, what counts as environmental crime varies a great deal across jurisdictions. Statutory inconsistencies and the lack of uniform codification in state environmental laws pose difficulties for prosecutors and investigators. At the same time, they create opportunities for environmental offenders, who can evade prosecution merely by moving their operations to jurisdictions that are legally more “user-friendly” from the offender’s point of view.
One of the most important types of environmental crime is the illegal disposal of hazardous waste materials. In recent years, research suggests that environmental criminals have become more sophisticated. Rather than simply dumping hazardous waste in some isolated area late at night (often called “midnight dumping”), today’s more sophisticated environmental criminal may forge a waste transportation manifest or bribe public officials to look the other way. Other techniques involve mixing hazardous waste with nonhazardous waste, known as “cocktailing”; mislabeling drums, or disposing of the waste on the generator’s own property. Cocktailing is particularly common in the oil industry when dumping used oil.