Thursday, January 22, 2015
The New York Times has the story, with a link to the criminal complaint, here. U.S. Attorney Preet Bharara followed his longstanding tradition of holding a press conference in order to make inflammatory, prejudicial, and improper public comments about the case.
Monday, January 12, 2015
A former Peru president is convicted "of funneling more than $40 million in public funds to tabloid newspapers that smeared his opponents during his 2000 re-election campaign." See AP, Former Peru President Convicted of Corruption
Tuesday, January 6, 2015
Monday, January 5, 2015
Many are focused on what sentence former Virginia Gov. Bob McDonnell will receive from the judge today. After all, he was convicted, and now is the time for him to be punished. But there is a second question, and an important one in this particular case, that also warrants consideration: Whether the former governor should be allowed to remain on bond pending his appeal. It should be an easy answer - he needs to remain free.
McDonnell’s case screams, ‘let’s wait before we put him behind bars.’ That’s because this is really a case about whether prosecutors stretched the law too far.
Creative federal prosecutions are not new and higher courts have been quick to strike prosecutions that exceed the boundaries of the law. Sometimes our courts have to remind prosecutors of John Adams words that we are “a government of laws, and not of men.”
We recently saw the Supreme Court strike down a prosecution that used the Chemical Weapons Convention Implementation Act to prosecute a woman for an attempted simple assault. And the Supreme Court is currently reviewing the government’s use of the Sarbanes Oxley Act to prosecute a fisherman for throwing fish overboard that a state official had asked him to bring to shore.
McDonnell prosecutors used a novel approach in bringing this case. They attempted to prosecute conduct that folks may find offensive. But merely being offensive is not enough for making something a crime. It has to be criminal under existing laws, as opposed to a new interpretation created by the government in order to bring their case to court.
This case wasn’t the typical bribery case of someone handing a person money and that individual doing a specific official act in return. When an appellate court finally gets its hands on this case, it may all come down to whether McDonnell corruptly performed or promised to perform an “official act.” But what constitutes an “official act” is not so easy to explain. Will it include any act that happens to be done by a government official? Will it make a difference in a federal prosecution that the government official happens to be elected to a state position? Will it make a difference that state ethics rules exist to oversee what may or may not be considered corrupt conduct?
So now an appellate court will need to decide whether McDonnell’s conduct fits within the language of the statute. And that is a substantial question of law, the test the court looks at in determining whether to grant bond pending appeal. Pending that decision, it seems that he should remain free.
Many convicted defendants before McDonnell have been allowed to stay out on bond pending their appeal. There’s Martha Stewart, who eventually decided to go ahead and serve her sentence; Bernie Ebbers who received a 25 year sentence; John and Timothy Rigas, who received 15 and 20 years, respectively, and actor Wesley Snipes, who was convicted in a tax case. All went to trial and were convicted. And all were offered the chance to remain free pending their appeal. One even finds former governors and congressman on the list of those who have been given an appellate bond – former Illinois Gov. George Ryan was the recipient of one and so was former representative William Jefferson.
In many instances, the trial judge is the one who grants the bond pending appeal. But in some cases, it has required a higher, appellate court to step in to order the release of the accused pending his or her appeal. That happened to former Alabama Gov. Donald Siegelman, who was initially granted bail.
The bottom line in most white collar cases comes down to whether the accused has a significant issue being raised on appeal that it is better to have resolved prior to the start of the sentence. After all, once the individual is incarcerated, you can’t take back the time they have served.
Creative federal prosecutions have cost prosecutors much time and money, with few rewards. And in some cases it takes appellate courts to step in and act – and until they do, McDonnell should remain free.
Friday, December 5, 2014
Transparency International has released their 2014 Corruption Perceptions Index. The Index contains a wealth of information regarding the perceived levels of public sector corruption in 175 countries and territories. Topping this year’s list with the highest score, thus indicating very low perceived levels of public sector corruption, is Denmark, which received a score of 92. Denmark is followed closely by New Zealand, which received a score of 91. At the bottom of the list are North Korea and Somalia, each with a score of 8. The United States is ranked 17th with a score of 74.
Along with interesting charts, figures, and analysis, the report contains stories of corruption from select locations. These include stories about corruption related to pharmaceuticals, medical care, food aid, education, and rule of law.
A very interesting report worth spending some time examining.
Tuesday, August 12, 2014
As I mentioned in my post last week, I moderated a roundtable discussion at this year's ABA annual meeting entitled Navigating the White Collar Crime Landscape in China. While the discussion included many unique and interesting insights into current trends and challenges in the field of white collar crime in China, I thought I might share just a few of the themes we heard from participants.
First, according to our participants, we should expect to see a continued focus on anti-corruption enforcement actions by both the United States and China. Second, it is important to note that China has begun focusing on the prosecution of high-level corporate employees, not just low-level employees and the corporation. Third, we should anticipate that China will continue to expand its anti-corruption mission, including directing more attention towards U.S. entities. In this regarding, it was also predicted that China may soon explore the adoption of an anti-corruption statute with extraterritorial jurisdiction to assist it in undertaking a broader anti-corruption mission similar to the U.S. This might mean we will soon see a Chinese version of the FCPA. Finally, several of our panelists noted that China is increasing its focus on data privacy and state secrets laws, including enforcing such laws against foreigners more vigorously.
Regarding this last theme from the discussion, I'll note that on the morning of our program two corporate investigators in China, one from the UK and the other from the U.S., were found guilty of purchasing private information regarding Chinese citizens. The pair, who are married, were well known in the internal investigation community in China and regularly performed work for large U.S. corporations, including GlaxoSmithKline. According to the charges, the pair violated Chinese law by illegally acquiring personal information on Chinese citizens and then selling that information to their clients. The first defendant, Peter Humphrey, was sentenced to two and a half years in prison. The second defendant, Yu Yingzeng, was sentenced to two years in prison. Those who perform due diligence and internal investigation work in China are keeping a close eye on this and related matters. You can read more about the prosecution in The Wall Street Journal.
Tuesday, October 29, 2013
USA Today has this story. Here is the interesting part, at least to federal sentencing aficionados. Renzi took the government to trial. Judge David Bury calculated Renzi's U.S. Sentencing Guidelines range at 97-121 months. (The government asked for a 9-12 year sentence.) Judge Bury downwardly varied to 36 months. This is striking, and yet another example of the Guidelines losing their luster in white collar cases. Under the law the Guidelines must be considered, but in an increasing number of cases they are being considered and ignored or discounted.
Wednesday, July 17, 2013
In a major blow to the government, the U.S. Court of Appeals for the Sixth Circuit has reversed the convictions of each and every defendant in U.S. v. Douglas C. Adams, et al. This was a high-profile RICO public corruption prosecution (premised on an alleged vote-buying scheme) brought by the U.S. Attorney's Office for the Eastern District of Kentucky. The Sixth Circuit vacated and remanded based on the following evidentiary errors: 1) admitting testimony from three cooperators regarding their drug-dealing activities with some of the defendants, which activities occurred 10 years prior to the alleged vote-buying scheme; 2) admitting an Inside Edition video that also discussed drug-dealing activities in the community; 3) admitting evidence of witness intimidation that could not be tied to any of the defendants; 4) the trial court's making of unprompted, substantive changes to the government's tape transcripts; 5) permitting use before the jury of the inaccurate transcripts that resulted from the unprompted changes; 6) admitting un-redacted, and highly prejudicial, versions of state election records which contained statements implicating the defendants in vote-buying schemes. This appears to be a case of government overkill in the presentation of its evidence, as the Sixth Circuit had no problem affirming the sufficiency of the evidence. The unanimous panel opinion was written by Judge Karen Nelson Moore. John Kline, Trevor Wells, and Jason Barclay argued the case for Appellants. With them on the various briefs were: Larry Mackey, Marty Pinales, Candace Crouse, Kent Westberry, Elizabeth Hughes, Jerry Gilbert, Robert Abell, Scott White, and Russ Baldani. Congratulations to all.
Thursday, June 27, 2013
The mark of the beast is fading a little, at least in the First Circuit. Amidst the hubbub of the Supreme Court's Wednesday rulings, the First Circuit quietly decided that 18 U.S.C. Section 666 can't be read to prohibit gratuities. This sets up a circuit split. The opinion in United States v. Fernandez & Maldanado is here.
Congratulations to Martin Weinberg, David Chesnoff, Kimberly Homan and Jose Pagan, who were on the brief for Appellant Bravo Fernandez. Congratulations to Abbe Lowell and Christopher Man, who were on the brief for Appellant Martinez Maldonado.
Monday, June 17, 2013
This makes me so damn proud to be an American. What a righteous Department of Justice we have! Always going after the malefactors of great wealth. And God Bless the Fan Belt Inspectors too. No crime is too small for the Bureau to root out.
Kudos to John Cook of Gawker.com for posting this item and to Anthony Colleluori for bringing it to my attention.
Friday, May 25, 2012
The Statement of Williams Connolly LLP, through Rob Cary, Brendan Sullivan, and Simon Latcovich, truly speaks for itself. We will have more to come on the DOJ's actions.
Wednesday, April 25, 2012
I expect that any day now one of my non-white-collar criminal clients will come to my office and ask me to incorporate him to protect him from future criminal liability. Of course, incorporation does not immunize an individual from criminal liability. Nor, generally, does it protect small corporations from prosecution.
However, it appears that just as massive corporations are "too big to fail," they are too big to prosecute. In the wake of the government's destruction of Arthur Andersen because of an ill-conceived, aggressive and ultimately unsuccessful indictment which caused the loss of thousands of jobs, DOJ has been highly reluctant to aggressively prosecute major corporations.
Although there are occasionally indictments of major corporations, most often these are disposed of by "deferred prosecutions," which are essentially delayed dismissals with financial penalties in numbers that are large in absolute terms but meager in comparison to the profits and assets of the corporation. To be sure, even when prosecuted to conviction, corporations do not go to jail and thus there may be little practical difference between a conviction of a corporation and a deferred prosecution. However, to the extent a goal of the criminal justice system is to achieve apparent fairness and equality, there is a genuine, if symbolic, reason for the prosecution of the large and powerful, whether they be individuals or corporations.
According to a thorough account in the New York Times this past Saturday, April 21, see here, Wal-Mart in Mexico, where the company has, according to the Times, one-fifth of its stores, engaged in a systemic countrywide scheme in which it spent millions of dollars to bribe hundreds of Mexican officials to gain favorable and expedited treatment and a competitive advantage. According to the Times, this conspiracy was not, as is often the case in corporate wrongdoing, the act of a rogue individual or group. Rather, it was orchestrated from the very top of the Wal-Mart Mexican hierarchy. Additionally, again according to the Times, when reports of this corruption reached Wal-Mart's U.S. headquarters, top executives took great pains to cover up the wrongdoing.
The alleged conspiracy, if the Times report is accurate, appears to be the kind of corporate crime, therefore, that deserves aggressive prosecution (not just an indictment and a deferred prosecution), especially if the government wants the Federal Corrupt Practices Act ("FCPA") to be taken seriously. Of course, there may be statute of limitations or other fact-finding or evidentiary problems involved in putting together a case involving facts from 2005, the year, according to the article, the bribe payments were made. It is far easier to write an article reporting corruption than to prove it under the rules of evidence beyond a reasonable doubt. It will be interesting to see what, if anything, DOJ does with respect to this matter.
Wednesday, February 22, 2012
Dominique Strauss-Kahn is once again in trouble with the law in relation to an investigation involving sexual activity. Strauss-Kahn was detained overnight in Lille, France, for questioning in a French investigation related to an alleged prostitution ring that purportedly supplied women for sex parties with Strauss-Kahn in Brussels, Paris and Washington.
Strauss-Kahn contends that he had no reason to believe that the women at these parties were prostitutes. His French lawyer bared that defense to French radio in December, "People are not always clothed at these parties. I challenge you to tell the difference between a nude prostitute and a classy lady in the nude." Reuters article, see here. This lack of scienter defense ironically appears to be the converse of what many believed would have been Strauss-Kahn's defense had the New York case in which he was accused of sexual assault gone to trial. In that case, it was expected that his defense would have been that he did believe that the woman in question was a prostitute.
The investigation, in which eight people have been charged, involves alleged misuse of corporate funds to pay for the services of the prostitutes. Engaging prostitutes is not illegal in France (although it is in Washington), but if the investigators determine that Strauss-Kahn had sex with prostitutes he knew had been paid for out of company funds, he might be charged as a beneficiary of that misuse of funds. Most likely, it will be difficult to prove that Strauss-Kahn, even if he were found to have known the women involved were prostitutes, knew how they were paid.
High-profile cases in other jurisdictions often affect prosecutorial priorities. One wonders whether this case will lead American prosecutors to scrutinize corporate books to determine whether corporate funds have been used to supply prostitutes to customers, political figures and others. I suspect that such payments (and consequent tax deductions as business expenses) are not wholly uncommon, at least for non-public businesses. Any resulting cases, involving both sex and corporate corruption, are sure to draw media attention.
Thursday, February 9, 2012
Here is Judge Emmet Sullivan's Memorandum Opinion ordering unredacted release of Hank Schuelke's Report on prosecutorial misconduct in the Ted Stevens prosecution. Any comments or objections to the report by the attorneys involved are due by March 8 and will be published along with the Report.
Wednesday, February 8, 2012
One of the supposed hallmarks of the American criminal justice system is the prudent exercise of prosecutorial discretion. But prosecutorial discretion, even when it works, is a blessing and a curse. A blessing, because it allows for the flexibility and compromise without which most systems, even well-constructed ones, cannot function. A curse, because liberty should not depend upon the the character and wisdom of the person temporarily wielding power.
The U.S. Attorney's Office for the Central District of California has decided not to prosecute Lance Armstrong. An announcement to that effect was made last Friday. The L.A. Times story is here. A good Washington Post piece is here. Today's Wall Street Journal discusses the declination and a potential future probe of of improper leaks related to the case. (An internal investigation of some kind appears to be warranted given the massive leaking that has occurred.) According to the WSJ, the declination decision by U.S. Attorney Andre Birotte and his top aides went against the recommendation of the two line AUSAs handling the case. Maybe, but take it with a grain of salt. News stories about the internal machinations of prosecution teams often get it wrong.
Based on what I know about the case, the decision to decline appears to have been a no-brainer. Recent federal prosecutions involving alleged drug use by star athletes have expended enormous sums of money with mixed or poor results. In the Armstrong matter, the doping, if it occurred, was not itself a federal crime. Prosecutors would have been peddling a wire fraud theory under which Armstrong allegedly defrauded team sponsors by intentionally violating a contractual obligation to avoid improper drug use. Not very sexy. Twelve typical American jurors might well wonder at the start of such a case, "Why are we even here?" Finally, Armstrong is enormously popular and has a sterling defense team with unlimited resources.
The U.S. Anti-Doping Agency (USADA) vows to continue its investigation, accurately noting that its "job is to protect clean sport rather than enforce specific criminal laws." But USADA wants the grand jury materials. This would be a travesty, and is unlikely to happen. Federal grand jury materials are presumptively secret by law for good reason. Don't count on a federal court sanctioning transfer of grand jury materials to an agency like USADA.
In other declination news, the DOJ attorneys prosecuting the Gabon sting case have informed U.S. District Judge Richard Leon that DOJ is considering dropping all future prosecutions. A decision will be made by February 21. The BLT piece is here. Full disclosure: I briefly represented one of the defendants, and considered representing another of the defendants, neither of whom has gone to trial. My comments here are based on the public record. The two cases brought to date have resulted in three acquittals and two hung juries. Nobody going to trial has been convicted in what DOJ thought was a sure win. Whatever merit there was in initially bringing the case, reconsideration is in order. The two trials to date have revealed a number of weaknesses. First, this was a sting--a crime engineered by the U.S. Government. Second, the informant who helped orchestrate it was far more compromised than the typical informant in a white collar case. Third, in a key tape recorded conversation between that informant and one of the defendants, the defendant seeks to back out of the alleged unlawful transaction, but the informant reels the defendant back in by telling him that attorneys have approved the deal. Fourth, the inherent ambiguities and weaknesses in the FCPA itself.
If there has been a benefit to the Gabon FCPA prosecution it is this--it has taught the white collar defense bar that FCPA cases can be fought and won and, presumably, has taught DOJ that FCPA cases aren't as easy to win as they first appear.
February 8, 2012 in Celebrities, Corruption, Current Affairs, FCPA, Fraud, Government Reports, Grand Jury, Investigations, Media, Prosecutions, Prosecutors, Sports, Statutes | Permalink | Comments (0) | TrackBack (0)
Tuesday, January 17, 2012
The Third Circuit in United States v. Wright held that the Skilling decision requires an new trial in this case on the honest services fraud convictions and that "prejudicial spillover tainted their traditional fraud convictions." The court stated:
"An honest services fraud prosecution for bribery after Skilling thus requires the factfinder to determine two things. First, it must conclude that the payor provided a benefit to a public official intending that he will thereby take favorable official acts that he would not otherwise take. Second, it must conclude that the official accepted those benefits with the intent to take official acts to benefit the payor."
The court also stated that, "[i]n light of Skilling, the jury should have been instructed on the bribery theory but not the conflict-of-interest theory."
Wednesday, November 23, 2011
My colleague Ellen Podgor recently commented here on Judge Emmet Sullivan's 11-21-11 ORDER in In Re SPECIAL PROCEEDINGS, the ancillary proceedings initiated by Judge Sullivan to investigate the multiple Brady violations committed by DOJ prosecutors in U.S. v. Theodore Stevens. The ensuing investigation was conducted, on Judge Sullivan's behalf, by veteran DC lawyers Hank Schuelke and William Shields, who have now issued a report that is, I hope, only temporarily under seal.
It is obvious from reading his Order that Judge Sullivan is still outraged. That's a good thing. Until enough federal judges get hopping mad about systemic DOJ Brady violations, we will have no real legislative discovery reform at the federal level.
In addition to the points highlighted by Professor Podgor, Judge Sullivan's Order notes the following findings and conclusions by Schuelke and Shields:
1. "[T]he investigation and prosecution of Stevens were 'permeated by the systematic concealment of significant exculpatory evidence which would have independently corroborated his defense and his testimony, and seriously damaged the testimony and credibility of the government's key witness.'"
2. "[A]t least some of the concealment was willful and intentional, and related to many of the issues raised by the defense during the course of the Stevens trial."
3. Schuelke and Shields "found evidence of concealment and serious misconduct that was previously unknown and almost certainly would never have been revealed--at least to the Court and to the public--but for their exhaustive investigation."
4. Schuelke does not recommend criminal contempt proceedings, because "in order to prove criminal contempt beyond a reasonable doubt under 18 U.S.C. [Section] 401 (3), the contemnor must disobey an order that is sufficiently 'clear and unequivocal at the time it is issued'... [but] no such Order existed in this case. Rather, the Court accepted the repeated representations of the subject prosecutors that they were familiar with their discovery obligations, were complying with those obligations, and were proceeding in good faith."
5. "Mr. Schuelke also notes that '[i]t should go without saying that neither Judge Sullivan, nor any District Judge, should have to order the Government to comply with its constitutional obligations, let alone that he should feel compelled to craft such an order with a view toward a criminal contempt prosecution, anticipating its willful violation.'"
6. "Mr. Schuelke 'offers no opinion as to whether a prosecution for Obstruction of Justice under 18 U.S.C. [Section] 1503 might lie against one or more of the subject attorneys and might meet the standard enunciated in 9-27.220 of the Principles of Federal Prosecution.'"
It is clear that most or all of this Report is going to be publicly released. It will be interesting to compare it to DOJ OPR's report, assuming that DOJ decides to release it. Two attorneys for two of the prosecutors under scrutiny have already announced that OPR's report clears their respective clients. DOJ has a long history of ignoring the critical comments of federal judges. The latest example of this took place in reference to the prosecution of former Blackwater employees. Despite Judge Ricardo Urbina's scathing factual findings regarding the conduct and credibility of the original set of prosecutors, they were treated to a laudatory/fawning DOJ press release upon reassignment. Urbina, like Sullivan, is one of the most respected federal judges in the country and his factual findings were not questioned or disputed on appeal.
Some final thoughts.
1. For every Emmet Sullivan (or Ricardo Urbina or Howard Matz) there are 10 federal judges who unquestioningly accept the Government's representations regarding Brady issues, irrespective of non-frivolous matters brought to their attention by the defense bar.
2. The defense attorney has an obligation to ferret out Brady issues through the filing of detailed, fact-specific Brady motions closely tied to the formal allegations in the case.
3. We must rapidly move toward open discovery in the federal criminal system, with appropriate safeguards in place to protect witnesses where necessary. The presumption, however, must always be in favor of open discovery. Many states have gone this route without any disastrous consequences. It is appalling that civil litigants have substantially more access to discovery at the federal level than do people who are literally fighting for their liberty.
4. In the meantime, federal prosecutors must be relieved of the burden of determining whether exculpatory information is material. DOJ already recommends this in the Ogden Memo, but it should go one step further and require it. The rule should be: IF IT HURTS MY CASE IN ANY WAY, TURN IT OVER! When a man judges himself, the verdict is always in his favor. When a federal prosecutor, in the heat of trial or pretrial battle, is deciding whether exculpatory evidence is material, the verdict will too often be that it is not. Let's end this invitation to injustice.
5. Of course, federal prosecutors do not think like criminal defense attorneys. That's okay. We don't want them to! But this is the very reason why they cannot ultimately be trusted to make the determination of what is or is not exculpatory. The competent defense attorney headed to trial or sentencing is constantly thinking about anything that will help the defense. Prosecutors are not trained or inclined to do this. Even when they are trying to fulllfil their Brady obligations, AND THE VAST MAJORITY OF FEDERAL PROSECUTORS ARE TRYING TO DO THIS, they cannot be trusted to spot the issues. This difference in outlook/inclination/thought processes really comes to the fore during the period leading up to sentencing hearings, when the prosecutor looks at the defense attorney like a deer in the headlights when reminded of his/her obligation to provide any and all mitigating evidence!
6. Please. Let's have no more: "We understand our Brady obligations and intend to abide by them." Congress should pass a statute requiring some form of detention for any prosecutor who utters this bromide.
November 23, 2011 in Contempt, Corruption, Current Affairs, Government Reports, Investigations, Judicial Opinions, Legal Ethics, Media, Obstruction, Perjury, Prosecutions, Prosecutors | Permalink | Comments (4) | TrackBack (0)
Tuesday, November 8, 2011
Second Circuit - United States v. Bahel - Honest Services - Post-Skilling, courts have struggled with what gets included as bribery and kickbacks and what gets omitted from the new contours of honest services. In Bahel, the defendant was convicted of four counts of mail and wire fraud premised on a deprivation of the United Nations, his former employer, and a 666 violation and conspiracy. Issues of immunity were considered, but the court said that the "United Nations expressly waived Bahel's immunity" and that irrespective he waived the issue. The court held that "Section 1346 is broad enough to encompass honest services fraud committed by a foreign worker at the United Nations."
Bahel also argued "that ‘[n]o reading of [18 U.S.C. § 666] could plausibly be extended to the charges in this case,’ because ‘[t]he United States’ membership in the United Nations is not a "federal program" under [Section] 666(b), and the contributions made to the United Nations under the United States treaty obligation in the U.N. Convention and Charter is not a "benefit" or "form of Federal assistance" under that same sub-section.’ Bahel argues accordingly that Section 666 cannot reach the conduct at issue in this case." The court, however, held that "the United Nations Participation Act, which authorizes the payment of the United States' dues to the United Nations (UN), is both a "federal program" and a "benefit" within the meaning of section 666, which encompasses bribes as well as illegal gratuities."
Sunday, August 7, 2011
It isn't all about the budget. And perhaps this one is ironic in many ways. But there have been some interesting hearings that are well worth noting. NACDL has a press release on the "Clean Up the Government Act" here. Also they have a Section-by-Section Analysis of the Clean Up the Government Act of 2011 (HR 2572). The hearing can be found here. And don't miss Tim P. O'Toole's (Miller & Chevalier) testimony before the House Committee on the Judiciary, Subcommittee on Crime, Terrorism & Homeland Security - Download OTooleTestimony_07262011
(esp) (blogging from Ottawa)
Tuesday, July 12, 2011
Guest Blogger - Carolyn F. McNiven (DLA Piper)
Although 56 percent of fraud cases were preceded by red flags, instances where actions were taken in response to those red flags "fell massively" since 2007, according to a global KPMG survey. This is probably the most surprising and eye-opening observation in KPMG’s 2011 study, which also found that most fraud was committed by long-term employees, particularly male executives between the ages of 36 and 45; and individuals who worked in the finance area. The increased failure to respond to red flags highlights the need for companies not only develop system for identifying red flags, but also acting on them.
The other notable development KPMG found was an increase in the number of fraud matters perpetrated by company board members. According to KPMG, fraud by board members increased from 11 percent in 2007 to 18 percent in the 2011 analysis. Overall, it found that, "people most often entrusted with a company’s sensitive information and able to override controls are statistically more likely to become perpetrators." Nevertheless, this increase in crimes perpetuated by board members is significant. KPMG’s global survey was based upon a review of 368 actual fraud investigations conducted by KPMG member firms in 69 countries, over the period January 2008 and December 2010. It only took into consideration frauds that were material to the company. According to KPMG, the majority of the investigations involved matters that were not publicized. Some might argue that the nature of the investigations themselves accounted for this result: namely that only larger companies are in a position to engage KPMG to investigate such matters, consequently perpetrators examined by KPMG are necessarily more likely to be corporate executives who are in a position to commit fraud that is material to such companies. While KPMG’s data pool was necessarily limited, I think that it would be a mistake to discount their observations. Among other things, their profile of a fraudster fits the typical demographic of white collar criminal defendants in the United States, at least those prosecuted for federal crimes in the past few years, and is consistent with what I observed during my over 13 year tenure with U.S. DOJ. Fraud is by and large an opportunistic crime. Insider-fraud thrives in environments of trust and access, as the survey points out. Individuals in the executive suite and higher level employees in the finance area are less likely on average to be closely supervised than clerks in accounts receivable. By analogy think of the security surrounding bank employees: tellers have their cash drawers counted after every shift; bank loan officers, who have access to vastly larger sums of bank funds, are generally not scrutinized in the same way although they too are human and subject to the same impulses to steal and self-deal. That being said, KPMG’s observation that most perpetrators were long term company employees, is noteworthy. KPMG found in its 2011 survey that a solid majority (60 percent) of perpetrators worked at the company for more than five years; and 33 percent of perpetrators had worked at the company over 10.
The other notable development KPMG found was an increase in the number of fraud matters perpetrated by company board members. According to KPMG, fraud by board members increased from 11 percent in 2007 to 18 percent in the 2011 analysis. Overall, it found that, "people most often entrusted with a company’s sensitive information and able to override controls are statistically more likely to become perpetrators." Nevertheless, this increase in crimes perpetuated by board members is significant.
KPMG’s global survey was based upon a review of 368 actual fraud investigations conducted by KPMG member firms in 69 countries, over the period January 2008 and December 2010. It only took into consideration frauds that were material to the company. According to KPMG, the majority of the investigations involved matters that were not publicized.
Some might argue that the nature of the investigations themselves accounted for this result: namely that only larger companies are in a position to engage KPMG to investigate such matters, consequently perpetrators examined by KPMG are necessarily more likely to be corporate executives who are in a position to commit fraud that is material to such companies. While KPMG’s data pool was necessarily limited, I think that it would be a mistake to discount their observations. Among other things, their profile of a fraudster fits the typical demographic of white collar criminal defendants in the United States, at least those prosecuted for federal crimes in the past few years, and is consistent with what I observed during my over 13 year tenure with U.S. DOJ.
Fraud is by and large an opportunistic crime. Insider-fraud thrives in environments of trust and access, as the survey points out. Individuals in the executive suite and higher level employees in the finance area are less likely on average to be closely supervised than clerks in accounts receivable. By analogy think of the security surrounding bank employees: tellers have their cash drawers counted after every shift; bank loan officers, who have access to vastly larger sums of bank funds, are generally not scrutinized in the same way although they too are human and subject to the same impulses to steal and self-deal.
That being said, KPMG’s observation that most perpetrators were long term company employees, is noteworthy. KPMG found in its 2011 survey that a solid majority (60 percent) of perpetrators worked at the company for more than five years; and 33 percent of perpetrators had worked at the company over 10.
So what turns a good employee into one who commits fraud? KPMG found that the primary motivators behind the fraud they investigated were greed and work pressure. KPMG found that attempts "to conceal losses or poor performance (possibly due to pressures to meet budgets and targets, to enhance bonuses, or to safeguard against loss of employment)" were motivating factors in many cases. Of course, greed – satisfied by misappropriating assets – was the other primary motivator that they identified.
Good employees turning bad may well also result from the same economic and cultural shifts we have seen in other areas. People -- particularly the middle class -- were hard hit in the recession resulting in increased financial pressure, which in turn can create the incentive to steal or "borrow" from one's employer. That incentive combined with a fairly systemic disenchantment with employers -- particularly those that downsized significantly --creates an environment where workers may be more likely to take what they can get from an employer, particularly if they believe that they are being undercompensated or the employer has transgressed in some way (for example, by paying its upper level management disproportionately while cutting staff and middle management).
All-in-all, KPMG’s 2011 global survey is eye-opening, and a reminder to all companies that they cannot be complacent. At a minimum, companies should regularly ensure that internal controls are operating effectively to prevent and detect insider fraud; and that red flags are not only seen, but acted upon.
Carolyn F. McNiven is a partner in DLA Piper’s San Francisco office where she is a Partner in the White Collar, Corporate Crime and Investigations practice. She is a former long-time federal prosecutor, and handles white collar criminal defense and related administrative, regulatory and compliance matters for individuals and companies. She has particular expertise in the areas of health care, food and drug, and FCPA compliance counseling, risk assessment and litigation.