Abstract

In the modern world, white-collar crime is one of the most widespread crimes, but the least understood threats. The damage that is inflicted due to white-collar crime can exceed the damage that is inflicted due to traditional offender acts in both magnitude and social impact. This paper examines how the current framework of white-collar crime systematically fails to detect, deter, and deliver justice for white-collar crime. The paper discusses how institutional blind spots based on flawed enforcement models, poor measurement frameworks, and victim neglect have continued the spread of inefficiency and impunity in corporate crime control.

This paper identifies two-fold crisis: a methodological failure in quantifying the actual scale of white-collar crime, and a sociological bias that tends to ignore the victims’ concerns and damages that are inflicted due to white-collar crime. This paper calls into question the bad guy narrative that emphasizes more on punishment than reform. Comparative case studies found that the current deterrence system was flawed due to poor governance, inadequate enforcement, etc.

This paper further suggests moving beyond the traditional method of punishing wrongdoers and adopting a method of prevention by putting victims first, improving data collection methods, and studying the minds and behavior of corporate offenders. This paper tries to reframe the white-collar crime from individual moral failure to a systematic and behavioral phenomenon. It attempts to establish an equitable and empirically grounded justice model. Thus, it provides a systematic and foundational framework for policymakers, enforcement agencies, and scholars to reconsider the concept of white-collar crime and the punitive approach for punishing the offenders of white-collar crime through an ethically informed governance system and evidence-based system. In conclusion, this paper suggests a need for a law or policy that focuses on a victim-centric approach by focusing more on protecting the victims than punishing the offenders.

Key words: White-collar crime, Victim Centric approach, Preventive framework, Deterrence, Corporate offender

1. Introduction

White-collar crime is a non-violent crime¹ that is committed mainly by a person with a high social status and respect. These people abuse their positions to commit white-collar crime. The crimes committed by these people are broadly divided into two categories: (1) economic crime, which is committed for personal benefit, and (2) corporate crime, which is committed for the benefit of business.² Mostly, this crime is considered less worrying and harmful than traditional crime³. Still, the national public survey on white-collar crime in the U.S shows that most people think that white-collar crime is more dangerous than conventional crime.⁴ Edwin Sutherland first proposed the definition of white-collar crime in 1939. He described it as ‘a crime committed by a person of respectability and high social status in the course of his occupation’. However, in the literature, white-collar crime is not clearly defined.⁵

Almost all countries in the world are affected by white-collar crime. It can affect individuals, the economy of the countries, and society as a whole. The Panama Papers leak is an example of a white-collar offense, where Vodafone, a U.K.-based company, allegedly hid its assets in Luxembourg to avoid high tax payments. Although it is legal, Vodafone is paying lower taxes than expected. Furthermore, due to Vodafone’s lower tax payments, ordinary citizens have to pay more taxes to compensate for the reduced tax payment made by Vodafone.⁶ The following case is from India, which is commonly known as the Ketan Parekh scam. In this case, Ketan Parek purchased a large number of stakes from smaller, unknown companies at lower prices. By using the method of circular trade with these small companies and other traders, he tends to increase the prices of stakes of these smaller companies. Due to a steep rise in the cost of these companies’ stakes, the Bombay Stock Exchange Sensex declined by 176 points.⁷ Due to the Ketan Parek scam, the stock market suffered a massive loss of ₹40 crore, resulting in a significant crash.⁸

2. The Evolving Landscape: Perceptions and Drivers of Corporate Fraud

2.1 The Social Construction of ‘Bad Guy’

White-collar crime is not a new concept; it has been prevalent in our society since the 19th century. However, in its 1st stage, white-collar crime was often considered less violent or similar to traditional crime. At that time, white-collar offences were considered victimless or equivalent to minor property offences.⁹ For instance, E.A Ross observed that the public is either unaware of or ignores white-collar crime offences. Similarly, Sutherland observed that people lack information about white-collar crime. Some surveys show that people are not ignorant about white-collar crime; instead, they are unaware of it. For instance, John Conklin observed that when white-collar crime scenarios are properly explained to the people, they become more concerned about white-collar crime and consider it more violent than traditional crimes.¹⁰ For example, after technological advancement in India, cybercrime is spreading, and mostly the uneducated and older people are victims of it because they do not have much knowledge about technological advancement. Furthermore, the government launched awareness campaigns, which enabled these individuals to become aware of cybercrime, resulting in fewer people being affected by it.¹¹ Similarly, when people became aware of white-collar crime, fewer individuals were affected by it.

On the other hand, in the second stage, people’s attention is rising towards white-collar crime. Research on public opinion about white-collar crime (from the mid-1970s to the 2000s) clearly shows that people are now aware of white-collar crime, considering it can cause substantial financial and physical harm to them, and thus view it as a serious offense. Now, people want the white-collar crime offender to be punished. Due to Scandals like the Waksal Scandal and the Ford Pinto case, people lost trust in political and corporate institutions, which resulted in increased awareness of white-collar crime and consideration of the need to punish white-collar offenders.¹² Similarly, due to technological advancements, people receive instant coverage of white-collar crime. As a result, people started considering white-collar crime as a grave crime, and depicted white-collar offenders as “Bad guys,” and they want stronger punishment for these bad guys.

2.2 Problem with the ‘Bad Guy’ Narrative

From our earlier discussion, it was clear that people now consider white-collar criminals as greedy and depict them as bad guys who deserve harsh punishment. The bad guy narrative demands accountability and harsher punishment for the offender. Still, it only focuses on the individual offender and not the corporation, and companies that indulge in white-collar crime, which can distract from systemic issues like weak regulation, poor enforcement, and political and economic factors that actually enable white-collar crime. This narrative also overlooks the white-collar crimes committed by corporations and companies, which in turn provides a roadmap for corporations and companies to engage in white-collar offenses.¹³

3. The Detection Dilemma: A Fragmented and Ineffective System

3.1.1 Internal vs. External Controls

By analyzing samples of U.S. companies that committed fraud between 1978 and 2001 and comparing them with non-fraudulent companies, it is revealed that fraudulent companies have a higher percentage of inside and gray directors. In contrast, non-fraudulent companies tend to have a higher rate of independent outside directors. The members of nomination and compensation committees in non-fraudulent companies are primarily comprised of independent outside directors. Conversely, in fraudulent companies, the members of these committees are mainly gray directors, which weakens board independence. By examining 75 fraud and non-fraud companies, it was found that the inclusion of independent outside directors reduces the likelihood of financial statement fraud, as it enhances the board’s monitoring system and increases the board’s effectiveness. Furthermore, it was discovered that fraudulent companies in the healthcare and technology sectors hold fewer audit committee meetings and have weaker internal audit functions, which enhances the likelihood of fraud. Moreover, fraudulent companies are less likely to establish a nominating committee than non-fraudulent companies. Overall, these finding shows that board independence of directors, outside directors, and regular audit committee meetings reduce the likelihood of fraud.¹⁴

Later research results clearly show that once endogeneity was considered, the internal corporate governance structure has no significant impact on the company’s performance. Even companies involved in fraud can adjust their corporate governance structure according to their own specific conditions, rather than based solely on their performance.¹⁵

3.1.2 The Real Detectors

Corporate detection is not the sole responsibility of a single institution or individual; several actors are involved in corporate fraud detection, some of whom do not have an official responsibility for detecting it, which is a type of white-collar crime. Employees are the most critical factor among all other fraud detectors because they are within the company and have access to all the company’s inside information. However, they face several risks when speaking up about the company’s fraud outside the company. Moreover, their contribution in uncovering corporate fraud is approximately 19% of all fraud cases. The other important stakeholder in the process of detecting corporate fraud is the industry regulator, which conducts inspections and compliance checks across various industries. By performing such compliance checks and inspections, they can identify corporate fraud. Regulators in the industry can identify about 14 percent of total fraud cases. The media also plays a significant role in detecting corporate fraud, as it brings scandalous information to the general public. Media can detect approximately 14% of all fraud cases. Government agencies, such as the Securities and Exchange Board of India (SEBI), which is the primary regulatory body responsible for detecting fraud, and auditors hired to verify the accuracy of financial statements of industries and companies, can also help detect corporate fraud. The Security and exchange commission (SEC) can detect only 6% of all fraud cases, and auditors can detect only 14% of all cases. This clearly shows that it not only depends on government agencies but also on non-governmental agencies, such as the media and employees. These findings also clearly demonstrate that corporate fraud detection can be effectively conducted jointly by individuals within and outside the company and organizations. Hence, for detecting corporate fraud effectively, all the detectors must work in conjunction.¹⁶

3.2 The Paradox of the Whistleblower

Employees are the most critical detectors among all other detectors. They are the first to notice the unethical behaviour of companies and industries, such as financial irregularities and suspicious activities, rather than external detectors like auditors and the media. They can see first because employees work closely with company personnel who are at a higher level within the company and have access to all internal company information. Even though employees are the most critical fraud detectors, most of them do not participate in fraud detection due to numerous personal and professional risks, including job loss, demotion, loss of professional reputation, fear of offender acts against them and their families. Employees also do not want to disclose the company’s fraud because they think they cannot get support from other employees or the legal system. In several cases, employees who exposed the company’s fraud have had to leave their jobs under pressure. Hence, it is clear that the employees are capable of detecting fraud, but they may be involved in it because they face numerous personal and professional risks. So they fear uncovering the scam. Several studies have clearly shown that when monetary incentives were introduced, a large number of employees came forward to report information about the company’s fraud. The Qui tam statute, which came under the Federal False Claims Act of the United States of America. This act can allow individuals to receive 15 to 30 percent of the total fraud recovered by the individual. This statute is successful in its objective because it is applied in various industries, including the healthcare industry. The rate of fraud detection by employees is higher in these countries than in others where this statute is not used. This clearly shows that when employees receive financial rewards for their honesty and courage, they are more likely to report fraud actively.

On the other hand, job security and the ability to report crimes anonymously cannot be adequate, which is brought by Sarbanes-Oxley act (SOX) of U.S.A. This research clearly demonstrates that employees require more substantial and direct incentives to participate actively in fraud detection. It is essential that employees can join in fraud detection, as they possess all the internal information about the company and are often the first to detect fraud.¹⁷

4. Deterrence and Punishment: A Crisis of Effectiveness

4.1 The Quantity vs. Quality Debate

As we earlier discussed, in the third phase of evolution, people started considering white-collar crime and termed white-collar crime offenders as bad guys and demanded harsher punishment for them. Hence, this paper discusses whether capital punishment can deter non-violent offenses, such as white-collar crime, by analyzing data from approximately 150 countries worldwide. By examining the data, we found that capital punishment can create fear in the mind of the offender, and hence it can help in deterring white-collar crime. By analyzing further, it was found that if a country has a better governance system with the rule of law, then the deterrent effect of capital punishment on white-collar crime diminishes. Some of the countries in the world have capital punishment on paper only; in these countries, the deterrent effect of capital punishment is very low.

Furthermore, in countries where the whole government system is corrupt and has weak judicial enforcement, the deterring effect of capital punishment on white-collar crime is very low. Hence, this section suggests that capital punishment is effective in deterring white-collar crime, but its effectiveness depends on the quality of law enforcement and the institutions in the countries. If the law enforcement and institutional quality are good, then the deterrence effect is very low; conversely, if these qualities are poor, the deterrence effect is high.

Overall, this section suggests that policymakers have to focus more on enhancing the governance system and the rule of law instead of harsher punishment for white-collar crime offenders. The enhancement of the rule of law and the governance system can deter white-collar crime without implementing harsher punishments like the death penalty for white-collar crime offenders.¹⁸

4.2 The Measurement Failure

This section discusses the enforcement of the deterrence system for white-collar crime. The enforcement of the collar crime deterrence system faces a methodological crisis. Determining the adequacy of the white-collar crime deterrence system is a challenging task. The primary challenge in determining adequacy is the lack of a clear definition of adequate enforcement. It isn’t very sensible to compare across different countries and institutions without a clear definition of proper enforcement. Other indicators, such as the rate of prosecution, the number of convictions, and surveys, can also help determine the effectiveness of the deterrence system for white-collar crime; however, these indicators are not able to effectively detect, prevent, or punish white-collar crime. Broader regulatory practices, such as compliance programs, corporate self-regulation, and preventive mechanisms outside the traditional offender justice system, are overlooked by these indicators.

The biggest problem in determining the adequacy of the deterrence system of white-collar crime is the dark figure of crime; most of the cases are unreported, unrecorded, and undetected. The primary reason behind the dark figure of white-collar crime is that it occurs within complex organisational systems that extend beyond the national borders of a single country. Due to a lack of evidence and ambiguity in the legal system, many pieces of evidence remain unexplored. Evidence also does not come to light because, in these types of crimes, high-profile offenders are often involved, and institutions are usually reluctant to deal with them. Hence, the organization of white-collar crime is largely unknown, and as a result, measuring the adequacy of enforcement of white-collar crime has become impossible. Furthermore, the available data is fragmented and inconsistent. Data available in official statistics is the collection of only those data that are brought into the legal system, whereas data collected through perception studies contain only subjective opinions. Both types fail to discuss the actual process of preventing and negotiating white-collar crime.¹⁹

5. Systemic Blind Spots: Marginalized Victims and Misunderstood Offenders

5.1 The Black Box of Victimization

The current system is unable to detect and give compensation to the victims of white-collar crime, and this is considered the biggest failure of the current system. The individual, business, and even entire community have to suffer harm due to white-collar crime, but are rarely recognized and or supported. Traditionally, white-collar crimes are considered less violent than street crimes, but due to technological advancement, people are demanding harsher punishment for white-collar offenders; however, harsher sentences were also not adequate, as discussed earlier.

The white-collar crime victims not only face economic loss but also face psychological pain like shame, stress, and depression, which can affect their mental health. Some of them lost their jobs and lives due to the adverse effects of white-collar crime. However, most individuals who are affected by white-collar crime cannot report the matter because of a feeling of embarrassment, due to a lack of knowledge on where to file these cases. A lack of clarity about whether the authorities seriously took their case or not, because people in higher positions mostly commit these types of crimes. The justice system also fails to provide adequate compensation to the victims.

Research and policy in the field of white-collar crime are not able to provide adequate mechanisms to offer compensation to victims of white-collar crime. Surveys and government data primarily focus on traditional street crime, which, as a result, fail to understand the real impact of white-collar crime on the victims, who are hidden, much like a ‘black box’.

There is a need for better research, laws, a support system, and more attention to fix the issue of white-collar crime on the victims. To achieve true justice, it is essential to acknowledge the suffering of victims and ensure that their voices are heard and respected.

Further, it is very challenging to identify white-collar crime victims because it involves several actors, such as institutions, businesses, and individuals, and is found in multiple layers. Sometimes, even victims are not aware that they are affected by white-collar crime. It is also challenging due to victim blaming, which portrays them as fools, greedy, and careless. Hence, to overcome the impact of white-collar crime, there is a need for awareness, policy reforms, and more research, which can deter white-collar crime.²⁰

5.2 The Blue-Collar Bias in Research

This section discusses research bias towards blue-collar crime, which is often committed by individuals of lower socioeconomic status in society. Current research on bioprediction, which utilizes biological information to forecast future outcomes, primarily focuses on predicting blue-collar crime. This includes crimes such as assault, murder, robbery, etc. However, focusing on these crimes is both inefficient and unfair. The focus on these violent crimes is inadequate because the crimes that cause the most significant harm to society are usually white-collar crimes like fraud, corruption, etc. There is a substantial financial loss, damage to health, and loss of life. These types of crime can affect thousands or even millions of people. Sometimes the victims are unaware that they are affected by white-collar crime. It is observed from different studies that white-collar crime is more dangerous and costly than traditional violent crime.

The focus on the blue-collar crime offender is unfair because it targets the people from one particular society who are already disadvantaged, face discrimination in society, and have limited opportunities. Hence, the biological research aimed at predicting crime resulted in bias towards the marginalized and underprivileged people of society. The stigma toward the already marginalized people is increased due to this, and the people who commit crimes that affect a large number of people can easily escape. This means that the efforts of the bioprediction survey strengthen the injustice because it is biased towards only one class of offenders in society.

To make bioprediction research a successful method for predicting crime, we must also explore the biological and psychological traits of white-collar crime offenders. By exploring the biological and psychological traits, the idea of corporate psychopathy was highlighted, which discusses specific personal characteristics like manipulativeness, lack of empathy, charm, etc. These types of characteristics are typically found in individuals in higher positions of authority. As we previously discussed, white-collar crime is generally committed by individuals in higher-level positions. Hence, the bioprediction method can aid in predicting white-collar crime when applied to individuals in higher positions. At the same time, these individuals cannot exhibit the same impulsivity as blue-collar offenders, but they cause massive social and economic harm.

Overall, this section discussed how the bioprediction method of research is flawed because it primarily focused on blue-collar crime offenders; however, if this research method were applied to white-collar offenders, it could become a successful approach.²¹

6. Conclusion and Way Forward

The conclusion of this paper discusses that even white-collar crime is the most dangerous crime, but the behavior of these white-collar crime offenders is not easily detected. White-collar crime has a profound impact on individuals, institutions, and the economy. Still, the current system focuses more on punishing white-collar offenders rather than using preventive methods. The bad guy narrative focuses on harsher punishment for the offender, while ignoring the flaws present in the government system and data collection. Research suggests that a deterrent model, such as capital punishment, can be effective in deterring white-collar crime. Still, if we improve the governance system, then there is no need for capital punishment. Moreover, the victims of white-collar crime have to suffer financial, emotional, and psychological losses, and they are also not adequately recognised or restituted. The bias of research towards blue-collar crime criminals deepen this imbalance.

The method of data collection needs to be enhanced because it is essential for addressing the hidden nature of white-collar crime. The hidden nature of white-collar crime remains unreported currently due to inadequate data collection methods. There is a need to define the “adequate enforcement” meaning by focusing more on quality and effectiveness rather than just prosecution. There is a need for the creation of a global and national database, which primarily consists of incidents, their impact on victims, and the outcomes of enforcement, that can help in measuring problems. The judicial accountability and governance system needs to be enhanced. It is essential to improve the government system, but enhancing it is not enough; it has to received sufficient support from internal agencies. To minimize loopholes and conflicts of interest, there is a need for internal auditing compliance. The protection of employees needs to be improved, and adequate rewards need to be given for their honest and brave work. Employees need to be protected and rewarded because they are the primary and significant fraud detectors, and they also face difficulties when disclosing fraud. There is a need for reform in the current justice system and to adopt a victim-centric approach, and recognize both financial and emotional suffering of the victim. The participation of the victim in policy making, mental health assistance for the victim, and a compensation mechanism need to be included in future legal reform. The scope of research and policymaking needs to expand to encompass the psychological, technological, and ethical aspects of white-collar crime. There is a need for the implementation of behavioral studies, biomarker research, and advanced technology systems, such as artificial intelligence (AI), in the development of effective prevention strategies. This can help create a balanced framework that prioritizes fairness and the prevention of human dignity over punishment. Furthermore, it helps promote a sustainable approach to deterring white-collar crime.