White-Collar Crime

What is a White-Collar Crime?

White-collar crime is a non-violent crime where the primary motive is typically financial in nature. White-collar criminals usually occupy a professional position of power and/or prestige, and one that commands well above average compensation.

The term “white-collar crime” was coined in the 1930s by sociologist and criminologist Edwin Sutherland. He used the phrase to describe the types of crimes commonly committed by “persons of respectability” – people who are recognized as possessing a high social status. Sutherland eventually founded the Bloomington School of Criminology at the State University of Indiana.

Prior to Sutherland’s introduction of the concept of white-collar crime, the upper classes of society were thought to be largely incapable of engaging in such criminal activity. Such a belief was so deeply entrenched in society that when Sutherland first published a book on the subject, some of America’s largest companies successfully sued to get the book heavily censored.

Blue-Collar vs. White-Collar Crimes

The difference between white-collar crime and blue-collar crime stems from the different types of criminal activity that the criminal has access to engage in.

Blue-collar crime, because of the more limited means of the people committing it, tends to be more straight-on – robbery, burglary, etc. In contrast, white-collar criminals are more often in a position – such as being a loan officer in a bank – to commit widespread and complex fraud schemes.

Types of White-Collar Crime

White-collar crime encompasses a wide range of offenses, including the following:

1. Fraud

Fraud is a broad term that encompasses several different schemes used to defraud people of their money. One of the most common and simplest is the offer to send someone a lot of money (say, $10,000) if they will simply send the fraudster a little money (say, $300 – the fraudster may represent the smaller sum as being a processing or finder’s fee). Of course, the fraudster gets the money that is sent to him but never sends out the money he promised to send.

2. Insider trading

Insider trading is trading done with the benefit of the trader possessing material, non-public information that gives him or her an advantage in the financial markets. For example, an employee at an investment bank may know that Company A is preparing to acquire Company B. The employee can buy stock in Company B with the expectation that the company’s stock will rise significantly in price once the acquisition becomes public knowledge.

3. Ponzi scheme

Named after Charles Ponzi, the original perpetrator of such a scheme, a Ponzi scheme is an investment scam that offers investors extremely high returns. It pays such returns to the initial investors with the newly deposited funds of new investors.

When the scammer is no longer able to attract a sufficient number of new clients to pay off the old ones, the scheme collapses like a house of cards, leaving many investors with huge losses.

4. Identity theft and other cybercrimes

Identity theft and computer system “hacking” are two of the most widespread computer crimes. It’s estimated that losses from identity theft in the United States alone totaled nearly $2 billion in 2019. California, with over 73,000 cases of identity theft reported, was the state whose citizens suffered the most from the crime – Florida was a very distant second with 37,000 reported cases.

5. Embezzlement

Embezzlement is a crime of theft, or larceny, that can range from an employee taking a few dollars out of a cash drawer to a complex scheme to transfer millions from a company’s accounts to the embezzler’s accounts.

6. Counterfeiting

Our money has become more colorful and expanded in detail because it had to in order to combat counterfeiting. With today’s computers and advanced laser printers, the old currency was just too easy to copy. However, it’s questionable how successful the government’s efforts in this area have been. Rumor has it that very high-quality copies of the new $100 bill were available within 24 hours of the new bill first being issued.

7. Money laundering

Money laundering is a service essential to the needs of criminals who deal with large amounts of cash. It involves funneling the cash through several accounts and eventually into legitimate businesses, where it becomes intermingled with the genuine revenues of the legitimate business and is no longer identifiable as having originally come from the commission of a crime.

8. Espionage

Espionage, or spying, is typically a white-collar crime. For example, an agent of a foreign government that wants to obtain part of Apple Inc. technology might approach an employee at Apple and offer to pay them $10,000 if they will provide a copy of the desired technology.

Classifying White-Collar Crime

White-collar crime is commonly subdivided into two broad, general categories:

1. Individual crimes

Individual crimes are financial crimes committed by an individual or a group of individuals. An example of an individual white-collar crime is a Ponzi scheme, such as the one run by Bernie Madoff. Other individual crimes in this category include identity theft, hacking, counterfeiting, and any of dozens of fraud schemes.

2. Corporate crimes

Some white-collar crime occurs on a corporate level. For example, a brokerage firm may let its trading desk employees engage in an insider trading scheme. Money laundering may also be conducted on a corporate level.

A Contributing Factor – The Internet

The explosion of the internet and ever-advancing technology has been accompanied by a corresponding rise in what is referred to as “cybercrime” – which is comprised of a myriad of online fraud schemes and various forms of “phishing” for people’s personal information to commit the crime of identity theft. Cybercrime is basically any crime that is committed with the aid of computer technology.

It’s difficult to keep in mind that the term “hacking” – where a computer criminal breaks into a large database, such as the credit card records of a retail store, to steal both identity information and money – didn’t even exist in the mainstream culture 30 years ago.

Also, many considered the terms “phishing,” “email scam,” and the all-encompassing “cybercrime” as foreign. Computers gave us tools and capabilities that formerly didn’t even exist.

However, “progress” always comes with a price – and the price tag for our computerized and cell phone-connected world is a whole new category of crimes that, like computers and cell phones themselves, simply didn’t exist until the advent of new technology made such crimes possible.

Keep Learning

Thank you for reading CFI’s guide to White-Collar Crime. In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

• Cash Larceny
• Fraud Triangle
• Pyramid Scheme
• Top Accounting Scandals
• See all ESG resources