In 2012, HSBC, the fifth biggest bank in the world, was found to have laundered money for Mexican drug cartels, violated international sanctions against rogue states, and facilitated al-Qaeda-linked accounts in transferring money to the United States. Investigations by the Senate discovered the bank to be severely negligent and consciously responsible for these crimes. For punishment, the bank was fined just four weeks of profit. The bank’s CEO, Stuart Gulliver, apologized and promised to not do it again. No one was jailed.
This isn’t an isolated event. It’s a common occurrence.
After the mortgage crisis of 2008, the Financial Crisis Inquiry Commission concluded that the banking industry had been full of predatory and fraudulent practices. The commission referred dozens of cases to prosecutors. But, although fines were paid, no one was indicted, no one was put on trial, and no one was jailed.
Meanwhile, the US is the world’s leader in criminal incarceration. It holds over two million people in jails and prisons, which constitutes an increase of over 500 percent from 40 years ago. Street crimes are the reason for the vast majority of those incarcerations, even though the average annual cost of street crime, according to the FBI, is $15 billion per year—but nearly $1 trillion per year for white-collar crime. Many cases of financial crime go unreported and among those that are reported, very few go to trial.
Crimes committed in the financial world often require an intricate understanding of financial markets. Simply put, one must understand the game’s mechanics and rules before understanding how they can be broken.
But the nuances of international financial markets aren’t easy to explain to a jury. As such, prosecutors increasingly seek to skip a trial altogether, and simply negotiate a plea bargain that involves fines and perfunctory promises to correct corporate behavior, but little in the way of meaningful punishment to either the company or its executives.
The modern corporation is designed to limit individual liability, which naturally limits the ability to effectively prosecute those at fault. And while corporations have many of the same rights as people, they can’t be physically jailed. So prosecutors often seek fines—fines which aren’t paid by the perpetrators, but by the company, and therefore ultimately by the stockholders.
Collateral consequences, such as in the cases of Arthur Anderson and Enron, can mean tens of thousands of innocent employees lose their jobs due to vigorous prosecution. Furthermore, decades of deregulation have left the economy heavily intertwined, where aggressively punishing large banks can hurt the wider economy.
To avoid these collateral consequences, the US government has undergone a period of deferred-protection agreements, whereby an offending company would simply acknowledge what it did was wrong, pay a fine, and promise to improve its behavior. From 2002 to 2016, the government arranged more than 400 such agreements. There’s little to show that these deter further misbehavior.
Samuel W. Buell, a law professor at Duke University who served as lead prosecutor in the Enron case, notes in his book, Capital Offenses, that the standard defense in a fraud case isn’t that fraud didn’t happen; it’s that the perpetrator didn’t know they were breaking the law.
Intent is remarkably difficult to prove in these instances. What if their accountants, lawyers, or superiors told them it was okay? What if this crime was considered an innovative business practice spread out across multiple employees? A leader may need more insight into the day-to-day operations of a company, while a rank-and-file worker may claim (s)he was only doing his job. The difference between corporate crime and shrewd business practice can sometimes come down to subtleties and context.
According to Buell, the government tends to only pursue prosecution in cases it thinks it can win, which explains why some crimes go unpunished. This approach has been somewhat successful: from 1996 to 2011, the average sentence given in cases of fraud nearly doubled, while, over the same period, sentencing dropped for federal crimes overall.
And, unlike street crime, where victims are often singular and vocal, financial crime has less obvious victims—a crime’s impact is often spread out thinly across shareholders, colleagues, and, even more broadly, the entire market.
The natural incentive of a corporation is to increase profit. The natural incentive of a worker is to stay on their boss’s good side. Meanwhile, the incentives for corporate whistleblowers are dismally low. Why report a crime that might never be discovered and might not even be a crime in the first place? Why ask if something is a crime when it’s working and you retain your deniability by maintaining ignorance? This structure of misplaced incentives leads to fewer financial crimes being reported, and therefore fewer financial crimes being punished.
A vast majority of corporate criminals are men from privileged demographics. Their wealth can afford high-powered legal counsel, and their education can see them navigate the legal system more adeptly than the average person.
Furthermore, prosecutors face a dilemma in crimes where the damage is purely financial: will this perpetrator be better able to pay restitution if they are in jail or if they’re working a high-paying job? What best serves justice?
Bias also exists within the context of the commission of the crime itself: a culture of confirming leadership decisions without scrutiny only enables possible instances of fraud. Finally, and perhaps most worryingly, the regulations that define financial crimes are often unfairly influenced by the campaign contributions of the very companies who may be committing them—which is hardly the case for the average person.
Before prosecution, there’s detection—and that’s where forensic investigators make their impact. From an internal perspective, forensic accountants can push for greater transparency in financial practices and a wider culture of ethics. From an external perspective, investigators can focus on building a concrete chain of evidence that builds a case against the specific perpetrators of a crime. In both spheres, emerging tech should play an increasing role. With a growing amount of data to draw upon, AI and machine learning can streamline compliance processes and uncover previously hidden patterns of financial crime.
While prosecutors may run into many of the same old constraining factors surrounding financial crime, investigators will remain on the front line of the fight, and today’s forensic accounting programs are preparing them for it.
John Jay College of Criminal Justice offers a BS in fraud examination and financial forensics at its Manhattan campus. Students will learn how to evaluate symptoms of fraud, conduct fraud risk assessments, utilize data-driven tech, and communicate their findings across numerous channels.
Courses cover ethical theory; forensic accounting; digital forensics for the fraud examiner; and corporate white-collar crime. The program consists of 120 credits.
The University of New Haven offers an MS degree in financial crimes investigation at its Connecticut campus. Students may choose to specialize the degree by focusing in either public-sector or private-sector applications. The curriculum ranges from instruction in financial fraud to international crime. Core courses cover subjects such as criminal procedure; white-collar crime analytics; investigating financial crime; and topics in investigations. Electives explore more nuanced areas of white-collar crime and criminal justice. The program consists of 30 credits.
Utica College’s BS in fraud and financial crime management allows students to concentrate in either fraud prevention and detection or financial investigation. The curriculum was developed in collaboration with the Economic Crime and Cybersecurity Institute, a research program at the forefront of studying financial crime for the last 20 years.
Courses cover topics such as fraud prevention and detection technologies; fraud and compliance operations; modern techniques in crime investigation; forensic accounting; fraud auditing; and criminological research methods.
David Shapiro is a distinguished lecturer at John Jay College of Criminal Justice, teaching classes in forensic accounting, white-collar crime, and forensic financial analysis. He received his MBA and his JD from Seton Hall University.
Shapiro’s expertise truly runs the gamut: he’s worked as a special agent with the FBI, as an assistant public prosecutor, and as a corporate investigator in the private sector. His focus throughout has been on financial crime risks. In addition to his work as coordinator of John Jay’s fraud examination and financial forensics (FEFF) program, he’s published numerous academic articles on white-collar crime and forensic accounting. Shapiro contributed a chapter to the 2012 book How They Got Away With It: White Collar Criminals and the Financial Meltdown.
Dr. Patrick Malloy serves as the director of the University of New Haven’s MS in investigations program. He received bachelor’s and master’s degrees in accounting from Adelphi University and a DBA in accounting from Argosy University.
Before becoming a member of the UNH faculty, he was Pfeiffer University’s chair of accounting and fraud investigations. Outside of academia, Dr. Malloy has maintained a personal accounting practice that focuses on internal controls compliance and fraud investigations. His professional research explores the potential of cyber-enabled financial investigations. Dr. Malloy won the Starnes Award in 2012 for his outstanding contributions as a leader, mentor, and educator.
Suzanne Lynch is a professor of financial crime and compliance management at Utica College. She received her BS in criminal justice from Wayne State University and her MS in economic crime management from Utica College. She’s served as the director of Utica’s Economic Crime Management program since 2010.
A global expert in fraud control and financial investigations, Lynch has worked in management positions at MasterCard, Goldman Sachs, and Comerica Bank, where she focused on overseeing issues of electronic banking fraud. She also has significant public sector experience, having conducted trainings with Europol, the NYPD, the US Secret Service, and ICE.
Matt Zbrog is a writer and researcher from Southern California. Since 2018, he’s written extensively about the increasing digitization of investigations, the growing importance of forensic science, and emerging areas of investigative practice like open source intelligence (OSINT) and blockchain forensics. His writing and research are focused on learning from those who know the subject best, including leaders and subject matter specialists from the Association of Certified Fraud Examiners (ACFE) and the American Academy of Forensic Science (AAFS). As part of the Big Employers in Forensics series, Matt has conducted detailed interviews with forensic experts at the ATF, DEA, FBI, and NCIS.