Corporate Crime Prevalent in Financial Industry in the United States of America


In the past four decades, the financial industry has been rocked by evolving wave of white collar or corporate crimes. Some of the commonly known white collar crimes that have continuously affected the financial industry include phenomenon of market-timing and late-trading practices that involving mutual, stock option scandals, the accounting fraud, IPO manipulation, the boiler boom practices, the insider-trading and looting of thrifts (Zack, 2013). Some of the most recent white collar crimes witnessed following global recession of 2008 included massive manipulation of key benchmark rates as well as the widespread miss-selling of complex financial derivatives instruments to both naïve and unknowledgeable investors.

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            Despite the fact that white collar crime in financial industry is not a new practice in any sense, the impact, the scope and the occurrence rate has increased significantly in the recent past. Studies have indicated that white collar crimes in financial industry is more endemic as compared to any other industry of the economy globally. According to Ferguson (2012), the criminality of white collar crimes in financial industry is occurring at a higher scale and cannot be perceived as exceptional. Putting into consideration the above observation, many have questioned the social legitimacy of the specific form of financial capitalism and contemporary financial industry in which it functions (Zepeda, 2013). Nonetheless, the ubiquity associated with illegal conduct in political economy, research in field of economic sociology and financial market failed to address the issues of financial crime. Therefore, this paper analyzed the white-collar or corporate crime prevalent in financial industry in the United States of America. The analysis focused on the environmental and cultural factors that influence the crime from the perspective of societal, institutional and organizational.

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Literature review

Financial statement fraud

            The financial statement fraud do occur in the financial industry in various forms including financial markets making false statements concerning financial health or true nature of an investment outlet such as investment product, borrower, fund and company. These include misrepresentation and deceptive element which is common in the financial industry. In the nutshell, financial statement fraud utilizes the information asymmetry shared between the parties in a financial transaction (Tombs, 2013). The combination of false information and illusion of disclosure increases financial statement fraud since the information asymmetry is widen. Many studies have analyzed the future-oriented nature of financial statement fraud as form of deception. Some scholars have focused on financial transactions in relations to the intangible rights where the present and the future value of the intangible rights depends entirely on the performance and status of the party issuing the rights. For example, when the perpetrators disseminate false information to the market, it leads to distortion of construal of the future prospects of these rights.

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            The false information that leads to financial statement fraud relates to all relevant information utilized in the investors to evaluate the future prospect and financial health of an investment. In general terms, fraudulent financial statement include misrepresentations perpetuated by representatives of a company or an investment fund during the process of disclosing the relevant information to the other market players, regulators and investors concerning the future prospects and financial health of the find or company (Shover, et al., 2012). Misrepresentation are generally conveyed through financial statements, financial reports, prospectuses and presentations. It is important to understand that misrepresentations are not only financial characteristics, it also include non-financial characteristics of the firm or organization such as ownership or credentials interest of executive management. This explains why many studies focused on financial statement fraud in financial industry as white-collar or corporate crime in the form of accounting fraud.

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            According to Leap (2007), accounting fraud occurs in two main objectives. The first objective involves the use of fraudulent accounting techniques. In simple terms, accountants in a financial institution uses fraudulent accounting techniques to cover up the misapplication or misappropriation of funds (Leap, 2007). The act is effected by insiders through falsification of the supporting documentations such as accounting ledgers in order to conceal a misrepresentation. The second objective is through a process of issuance of fraudulent financial statement by the management in order to present untrue picture regarding the future prospect and profitability of the institution thus misleading the regulators or investors to make wrong decisions.

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Rogue traders in financial firms

            Rogue traders is one of the corporate accounting crime that have continuously emerged in the past 30 years in the proprietary trading desks of investment banks and securities firms. Analysis indicated that some securities traders employed in the trading desks repeatedly engages in fraudulent acquisition or sales of derivatives, commodities, securities and subsequently interfering with internal control systems in order to make trading activities to appear less risky and more profitable (Jeffers, & Mogielnicki, 2010). Rogue traders is a fairly new phenomenon in the financial industry but its prevalence rate in the sector has led to lose of billions of dollars in commercial banks and securities firms. Studies have indicated that increased availability of derivatives does not only allows traders to take trading positions that has previously been untaken, but it also undermine the willingness or capacity of the top management to closely supervise trader’s trading activities.

            Normally, rogue trader scandals starts when the traders carries out unauthorized trades that leads in trading positions that goes beyond loss limit, risk limits or both set by the financial institution. As opposed to addressing the issues that contributes to deteriorating position and overturning the losses in a legal way, the rogue traders use unauthorized methods to double down their losses. In the long run the losses and risks accumulates until it reaches the point whereby the traders are forced to conceal the unauthorized activities by active circumvention of internal control, forged documentation and fraudulent accounting (Rosoff, et al., 2014). Literature review have shown that when these activities are concealed over an extended period of time, it continues to deceive the investors and leads to a long-term misrepresentation of true trading activities. For example, Toshide Iguchi concealed the true presentation of the Daiwa Bank performance for approximately eleven years,

            In terms of prevalence, most literature review have indicated that it is fairly high frequent but has high negative impacts in the financial industry because it leads to loss of billions of dollars in the long-run. Statistics have indicated that the case of detected rogue traders is fairly small as compared to the accounting fraud cases detected in the public companies (Krawiec, 2009). However, its consequences are of higher magnitude as compared to accounting fraud. For example, the literature review indicated that correcting of losses and readjustment of financial statement reflects scandals caused by rogue traders to range from $118 million to $7.2 billion. According to Krawiec (2009), rogue trading scandal causes a direct threat to the existence and stability of the established financial institutions. For example, the British investment bank Baring which has been in operations for over 200 years was brought down by rogue trading when one of its derivatives traders was discovered to have been engaging in fraudulent activities at the bank’s Tokyo branch. The rogue traders was Nick Leeson and the discovery led the bank to lose more than $1 billion. This shows how rogue trading can affect the performance of the financial institutions upon its discovery.  

Mortgage origination fraud

            Literature review have shown that housing bubbles that preceded the global financial crisis of 2008 was attributed to the significant corporate crimes that occurred in the form of mortgage fraud. Further analysis indicated that mortgage industry is divided into distinct categories: primary mortgage market and secondary mortgage market. The primary mortgage market consist of mortgage originators with assistance of appraisers, escrow agents and brokers provides loans to the borrowers (Wright, 2008). On the other hand, secondary mortgage market involves credit rating agencies, government sponsored enterprises and investment banks takes part in business operations that include managing and securitizing loans that comes from the primary mortgage market. Studies indicated that the prevalence of white-collar or corporate crime in both categories of mortgage was rampant.

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            In terms of prevalence of white-collar crime in the form of mortgage fraud, there is clear indication that starting from 1990s to today, mortgage fraud has increased significantly in the United States. The effective methodology of monitoring and determining the prevalence of mortgage fraud is through Suspicious Activity Reports (SARs) which is generated by the US Treasury Department’s Federal Financial Crimes Enforcement Network (Ferguson, 2012). The general public report any mortgage related fraud they suspect or encounter in their daily activities. Statistics indicated that between 1997 and 2006, white-collar crime in the form of mortgage increased by 1,400 %. Despite the collapse of subprime mortgage market, the mortgage continues to increase annually. US Mortgage Bankers Association estimated that this white-collar crime cost the financial industry loss ranging from $946 million and $4.2 billion.

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Financial swindles, cons and scams

            Financial swindles, cons and scams is a form of white-collar or corporate crime that involves fully fraudulent and deceptive schemes utilized by fraudsters. Typically, fraudsters assume a fake identity or exhibits aura of trustworthiness, induce, mislead or convince financial institutions and individuals to voluntarily or willingly give out sensitive information that relates to financial information (Zack, 2013). It is important to understand that financial swindles, cons and scams is different from financial statement fraud in the sense that from the beginning it is designed as larceny scheme or con games. In addition, it is also different from fraudulent mis-selling practices because it exceeds suggestive communications and misleading.

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            There two types of financial scams that are common in the financial industry. The first financial scam follows a specific pattern where the fraudster convinces the inventors to put their money in scam enterprise such as insurance policy, real estate project and investment fund, thus fleecing out the money (Tombs, 2013). The second financial scam follows an intermediating step. For instance, in the first step, the fraudster convince the victim which is the financial institution to reveal the relevant information such as passwords, security codes, account numbers and credit cards. The second step involves the use of the obtained information to fleece the account of financial institutions. Therefore, the first financial scam is investment scam and the second financial scam is the financial identity scam.   

            The investment scam targets debt issued, equity stakes or shares that are dubious or fake and typically backed by business opportunity, technology and hot new product. Studies have shown that precious-metal mining operations in the United States is one of the suitable targets for investment scam (Jeffers, & Mogielnicki, 2010). Statistics indicated that the prevalence of the financial swindles, cons and scam is fairly high but its impacts are high in the economy status and the performance of the financial industry. The individuals perpetrating the acts are known to be great flatteners, good listeners, good dressing, presentable, captivating and charming.

Fraudulent financial mis-selling

            As explained in the introductory part, fraudulent financial mis-selling is described as manipulation and deceptive marketing, advising or selling financial service or product to the end user. The individual is fully aware that the financial service or product is not suitable to meet the end user’s needs (Wright, 2008). The basis of fraudulent financial mis-selling is the exploitation of information asymmetry. This also include the exploitation of the asymmetry of the financial expertise by interpretation and extracting the meaning of information regarding the future of a financial product. Studies have shown that individual that perpetrate fraudulent mis-selling engages in double role as adviser and sales agent in financial institution. For example, broker-dealers, financial advisers, brokers and direct salesmen provides the end user with unsuitable advice due to lack of competence as required by regulations.

            Literature review indicated that fraudulent mis-selling activities are prevalent in the financial service industry. However, considering the high prevalence rate of fraudulent mis-selling practice in financial service industry, little research has been down about the issue. Review of literature indicated that only few comprehensive studies have scrutinize fraudulent mis-selling practice in the financial service industry (Leap, 2007). These studies have shown that two major factors have contributed to high prevalence rate of fraudulent mis-selling in financial industry: the increased financial autonomy and limited knowledge of financial literacy and changing distribution channels and biased financial advice. This factors have significantly impacted negatively the ability of the consumers to make informed decision concerning financial affairs. Due to lack of proper knowledge and limited experience about financial decisions, consumer tend to fall prey of those individuals perpetrating fraudulent mis-selling. Studies have indicated that vulnerability of these people are exploited with main objective of maximizing profit.

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            Literature review indicated that white-collar or corporate crime in financial industry is widespread and in the recent past, the issues of white-collar crime has continued to intensify both in wholesale and retail financial market. although some scholar argued that some form of white-collar crimes in financial industry does not occur at high frequency as compared to other forms and it not warrant more attention, it is effects in terms monetary continues to increase annually (Zepeda, 2013). In addition, the effects of white-collar crime in financial industry goes beyond the monetary cost to include societal cost, monetary cost to the financial institution, economic cost to the victims and firms affected, psychological and emotional costs. The consequence are so detrimental that can lead to potential financial collapses and damage reputation of the firm.

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            In terms of legal issues, there is thin line between white-collar crime and aggressive but legal sales activities. Most of the literature that focused on evaluating the level of illegality resulting from white-collar crime in financial industry hinged on the relationship between transacting parties. However, the general fraud laws criminalize employees of the financial institutions from misrepresentation that leads to white-collar crimes (Rosoff, et al., 2014). Nonetheless, there are several legal concepts that addresses the issues of white-collar or corporate crime. Some of these legal concepts are jurisdictional. For example, regulatory and legal framework that have been put in place requires that parties to engage in fair dealings and ethical business conduct standards on parties that are active in financial industry. The second aspect that regulatory and legal framework subject parties is suitability requirements of the adviser of the financial service or product, banking, insurance, commodities and securities.

            From the perspective of societal culture, literature review indicated that the most affected institution have not necessarily nurture the culture of fraud. The acts of white-collar crimes in financial industry are mostly driven by the acts of greedy and the prevailing conditions at that particular time. Some acts started as small mistake but grown to be a major problem because the employees have concealed the problem for a long time (Krawiec, 2009). This is also tied to the institutional culture in the sense that financial industry create some opportunities for the exploiters to maximize. For example, some advisers take the advantage of the financial literacy of the end user and fleeces of their money. In terms of organizational policy, literature review indicated that some ambiguity in legal and regulatory framework encourages individuals to break the law. For example, there is no clear distinction between aggressive sales and fraudulent mis-selling. This makes it challenging to determine whether aggressive sales has become illegal.


            Literature review clearly shown that white-collar or corporate crime in the financial industry has continued to increase in the recent past. The financial industry was most affected by white-collar or corporate crime immediately before global financial crisis of 2007-2008. Some scholar have argued that the effects of financial crisis of 2007 – 2008 was attributed to the white-collar crimes committed in the financial industry. However, there was concrete evidence to connect their argument with the events that preceded global financial crisis of 2007 -2008. This calls for comprehensive analysis and studies to determine the relationship between white-collar crime with the events that preceded global financial crisis of 2007 – 2008.

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  • Effective legal and regulatory framework that addresses the issues of ambiguities that exist in the current laws.
  • End users that lack financial literary and have limited knowledge about financial affairs should advise from the trustworthy financial institution.
  • The financial institutions should punish the perpetrators heavily when found flouting the laws.

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