Read part 1: Why People Engage in White-Collar Crime
Any conversation around white-collar crime, needs to drill down into motivations. What drives people – who are often seen as exemplary in many other ways – to commit criminal acts. That is what we will focus on here in part two of our white-collar crime series.
Eugene Soltes, a Harvard professor, has provided us with a few insights in his book “Why They Do It.” Soltes directs our attention to the perpetrators of such crimes. His work is based heavily on actual interviews that he conducted with white-collar criminals currently serving their sentences.
Traditionally, white-collar crime has been blamed on the lack of self-control, deviant behavior, the “bad apple” concept, pathological characteristics, brain chemistry, psychopathy and even peer pressure.
A lot of these theories have been discredited while others have revealed very little. So, Soltes decided that he would hear it directly from the horse’s mouth.
In his interviews, one common response that he always received was that the perpetrator never stopped to think of the consequences. These executives-turned-criminals didn’t even consider the possibility that what they were engaging in, at the time, could be a crime. In other words, there was no self-reflection on their part.
Soltes goes further into the rabbit hole and explores the very psychology behind decision making. What he suggests is something that fits in perfectly with Buell’s ideas. In modern corporations and organizations, the leader has very little exposure to the customer, shareholder, or even the general public.
This metaphorical distance prevents the decision-makers from seeing what their decisions can do.
This metaphorical distance prevents the decision-makers from seeing what their decisions can do. They see their actions as being unremarkable and even necessary, thereby, unwittingly failing to acknowledge the possible disasters that could occur as a result. In other words, there are no moral and ethical filters being used.
So, how do we solve the problem?
Over the years, organizations and regulators have toiled hard to put in place in a solution that steers organizations to an ethical path of doing business. After all the factors coming together, the rationalization is the key. Let's see potential solutions in place from the country level to an individual level.
The regulators have tried to incentivize the whistleblower for bringing the truth to the public. The regulators have place mechanisms where whistle-blowers can bring in a lawsuit on their behalf, in case they are spread thin to carry out the investigation. The biggest testament is the Qui tam lawsuits, where a suit can be brought directly against the organization over issues such as the False Claims Act, and the whistleblower is incentivized well for the same. On the other hand, the Dodd-Frank Wall Street Reform and Consumer Protection also acts as a safeguard and incentivize whistleblowers in the financial world, where the government can recover lost funds and fraud is proven.
SEC and DOJ have gone hard on organizations with living penalties in the range of millions of dollars for an act which might be considered unethical on the part of the organization. Besides civil and criminal penalties, they have other actions up their sleeves where the government penalizes the organization (aka the contractor) by excluding them from limited to all future contract, suffocating their business to slow death, on the evidence that the officers or managing employee knew or “should have known” about the wrongful conduct. Furthermore, the memo from Sally Yates has peered the corporate wale by going after individuals especially the c-suite. As an example refer to People v. Guiamelon, (2012) where a conviction under state health care anti-kickback law penalized a physician’s, rather than sanctioning the organization.
The mechanism put in the society has been on the lines of solutions provided by Soltes and Buell. Soltes suggests preventive measures such as appointing people who have the authority to question top-level executives. When executives have their decisions questioned by a larger group of people, the chances of them acting selfishly or shortsightedly are likely to be much lower.
The most important thing to do is to redefine corruption.
Buell, on the other hand, suggests more transparency, stricter regulations and even incentivized “good behavior.” However, he says, the most important thing to do is to redefine corruption. From this point, we dive into the fact that organizations play a role in going beyond the law. Law is a minimum baseline by which societies are required to function and not the maximum one.
Organizations have been directed to implement a Compliance Program, in line with U.S. Federal Sentencing Guidelines §8B2.1(a)(2) to “encourages ethical conduct and a commitment to compliance with the law.” Organizations who feel responsible toward their customers develop such a program voluntarily.
Some of the examples that come to my mind where business decisions should depend on the compliance program which can help nurture a culture of compliance are:
- For the love of the law. With organizations being penalized and new case law bring formed lately, all organizations need to be wary of their outcomes.
- Compliance as a part of the strategy / Culture of Compliance. True values are demonstrated when the C-suite and board realize that a business decision cannot be based on wild west actions but instead need to reinforce their compliance program standards. Simply put, involve compliance officer in strategy meetings.
- Reputation as a function of ethics. Reputation is not an output of profit and revenue but rather an equal function of the organization's ethical culture. There are a few companies which are a testament to the fact that ethics matter such as “Tata” which took over Landrover and Jaguar, Lilly the pharmaceutical, GE and other companies on the list of World's Most Ethical Companies.
- Yearly appraisal. Integrate ethics and compliance as a part of an organization's annual appraisal, whether it may be a promotion or merely the annual evaluation.
- Incentivizing ethical behavior. This point is a debatable one, but I shall still put it out there since some schools of thought believe that ethics should be expected and therefore should not be incentivized. So organizations should set out incentives for people who try to stand out from others for the betterment of ethics and to penalize the rogue employees even though he/she might be the best sales performers, who are under tremendous pressure to bring in business.
- Safeguarding employees against retaliation. A culture of fear can railroad the culture of compliance. Being an investigator, I understand that everything requires evidence. Thus, a internal reporting mechanism needs to be put in place that safeguards employees from retaliation. Management oversight and tone and the top are two significant factors that can help curb retaliation.
- Sharing values with third parties / agents. The "Respondent superior doctrine," which implies “let the master answer” is a doctrine that states a party is responsible (Civil and Criminal) for acts of their agents as witnessed in the New York Central & Hudson River Railroad Company v. the U.S.A. This doctrine is the core which states that organizations are liable for the acts of their agents even if they are not authorized. Thus it is imperative that thorough third-party risk due diligence is performed before you take employees or agents on board. At no stage does it mean that the agents can go Scot free, they would equally be held responsible but to a lesser degree than the master hiring them as witnessed in US v. Reis.
- Communication and transparency. Creating an environment of secrecy can lead to a culture of risk and thus unethical acts and potential white collar crimes.
- Retaining and respecting leaving employees. Exit interviews can provide honest feedback on brewing misconduct and toxic environments within the business. They, therefore, should be taken very seriously and should act as an input to the monitoring plan since this will give a lot of visible pointers to the prevailing conditions.