Traditionally referred to as crimes of the powerful or corporate crime, Sutherland (1949) defines white collar crime as crime committed by respectable individuals of high social status during the course of their occupations. Sutherland (1949) further postulates that the financial costs of such crimes could potentially be boundless and that the loss of society could be greater than the crime itself. Hence, white collar crime is often regarded as corporate fraud which by definition is criminal deception through the use of false representation (Oxford English Dictionary).
A popular tool of measurement for fraud would be the fraud triangle which was originally established by Cressy, a criminologist who interviewed prisoners such as embezzlers and identified three common behaviors: motivation, an un-shareable opportunity and rationalization (Huber, 2017). Cressey (1973) then theorized that when a fraud is committed, the violator is aware that there is a financial problem but believes it cannot be shared with others. He further hypothesized that there needs to be a perceived opportunity to secretly resolve this violation of financial trust and the violator would essentially rationalize this behavior to justify his actions. Hence, in crimes involving fraud, often a material false statement is made knowingly by the violator which the victim would have relied on. This in turn would have led to damages incurred by the victim.
A relatable case study of this was the fall of Barings Bank in UK in 1995 that created shockwaves in both the corporate and financial communities around the world. Nick Leeson, a young inexperienced trader at Barings in Singapore had accumulated more than one billion in losses through illicit trading of futures contracts. He had taken these contracts speculatively and unfortunately it was also during this time that the Japanese market had turned in the opposite direction than that of his expectations.
Despite having little experience in trading, he was appointed in a dual capacity as both General Manager and Head Trader in the Singapore market and was charged with the actual trading on the stock exchange floor and as well as the trading accounts. The lack of segregation in duties has since been widely cited as one of the main shortcomings that led to the fall of Barings. By appointing him in a dual capacity, it granted him too much authority which is generally regarded as an unaccepted principle, similar to an individual being both a chief executive and chairman of an organization.
He had created an “errors and omissions account” which would absorb any differences in trading balances at the end of each month and after several errors by his inexperienced trading staff, he tried to recuperate these losses by using the money of the bank’s clients so as to evade trouble. He was successful in clearing the losses at the beginning and made large speculative profits.
Subsequently, when he incurred large losses from an options contract on the yen purchased by a French client, he created a secret errors account to hide the losses. As an attempt to cover these losses after the client left, he then began to trade using the bank’s account illegally. But this time, he was not able to recuperate the losses and eventually ran up a debt in yen options of four hundred million dollars. Leeson then left a message for Barings’ managers to close the losing position and went into hiding at a holiday resort. Unfortunately for him, the positions were not closed and the losses increased to 830 million pounds. He had callously thought that the bank would solve the problem and did not anticipate that this would lead the bank to collapse. Though, Leeson had behaved unethically, it was essentially concluded that the bank’s failure to implement proper corporate governance had led to its irreparable failure.
Admittedly, the bank’s management team in the UK did not act to sort the problem out even though they knew there was a very large client making huge losses and that Leeson was trading on behalf of that client. What they failed to realize was that the ‘large client’ was in fact the bank. They continued to render support of his trading as they were under the impression that Leeson was covering payments for clients and had not realized that the funds was in fact used for his own trading. Had the bank exercised the right level of control, this situation could have been avoided. The auditor who was auditing the bank was called back to London before the audit was completed. It was hence evident there was also a failure of the audit function. Despite having acknowledged that Leeson should not have been placed in a dual capacity as both general manager and head trader, no actions were taken to change this.
Furthermore, the director in Singapore did not want to hire qualified traders under Leeson for cost saving measures. By the time Barings realized how grave the situation was, it was too late.
In summary, apart from Leeson’s unlawful behavior, the senior management was also to be blamed as there was a lack of segregation of Leeson’s duties, they were unable to recognize unsual profits, simply did not understand what had happened in Singapore and failed to conduct investigations. The lack of internal control measurements to constrain Leeson’s activities is largely to be blamed for this affair (Solomon, 2013).
Hence it is imperative that proper corporate governance initiatives be adopted by companies to improve accountability and transparency. Some key elements to prevent fraud include creating maintain a culture of honesty and high ethics and for organizations to constantly evaluate potential risks and implement policies and controls to mitigate the risk in order to reduce the opportunity for fraud. Furthermore, it is also critical for organizations to ensure that the tone is set at the top by ensuring that management behaves in an ethical manner and firm communications are cascaded to employees that there is zero intolerance for dishonesty and unethical behavior.