Fall 2011- Chapter 6- Hybrid White Collar Crime- Parts 2 and 3

Fall 2011- Chapter 6- Hybrid White Collar Crime- Parts 2 and 3

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Unformatted text preview: Hybrid White Collar Crime Hybrid White Collar Crime Part 2 White Collar Crime CRJU E491W­ Fall 2011 William C. Smith Globalization Globalization The term globalization refers to the trend of growing worldwide dominance by transnational corporations, international financial institutions, and related special interest groups, associated with a free­market capitalist system that disproportionately benefits the wealthy and powerful. The United States, as a supporter of the North American Free Trade Agreement (NAFTA) in 1993, has strongly promoted global free trade but has also been accused of causing harm to farmers, merchants, and consumers in other countries as it attempts to protect its own interests. Crimes of Globalization Crimes of Globalization Crimes of Globalization are white collar crimes which take place across national borders, often involving the exploitation of citizens of developing nations by the business interests of industrialized nations. Crimes of globalization typically do not result from an intention to cause harm but result from coordinated policy decisions that result in devastating financial and human consequences for large numbers of especially vulnerable people. The Anti­globalization Movement The Anti­globalization Movement The anti­globalization movement, also known as the global justice movement, is a movement opposing global free trade trends, on the grounds that they allow powerful nations to exploit weaker ones and harm the people and environment in developing countries. The movement contends that large­scale crimes are being carried out in the name of globalization and that people in developing countries are especially vulnerable due to weak regulation and limited resources of their governments. The Role of Financial Institutions The Role of Financial Institutions Three international financial institutions have been identified as playing a central role in the current trend of globalization. All three have become prime targets for criticism because of their purportedly injurious policies and practices. The institutions are: The World Trade Organization whose primary mission is to foster trade; The International Monetary Fund, which seeks to maximize financial stability; and The World Bank, whose primary mission is focused on promoting development. The World Trade Organization, the International Monetary Fund, and the World Bank have close ties with each other, and their activities are often so intertwined that the lines between them often become blurred. A significant amount of evidence exists to suggest that the collective activities of the three institutions have been more directed towards the interests of developed countries and their privileged institutions rather than towards the interests of the poor in developing countries. The World Bank The World Bank The World Bank is an international financial institution with 180 member states and $30 billion in annual loans, established in 1944 to help rebuild economies ravaged by World War II. The World Bank is not a bank in the usual sense of the word. An individual cannot open an account or ask for a loan. Rather, the Bank provides loans, grants and technical assistance to countries and the private sector to reduce poverty in developing and transition countries. The Bank’s Composition The Bank’s Composition The World Bank Group is made up of five separate branches. Two branches, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) work primarily with governments and together are commonly known as “the World Bank.” Two other branches, the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA), directly support private businesses investing in developing countries. The remaining branch is the International Center for Settlement of Investment Disputes (ICSID), which arbitrates disagreements between foreign investors and governments. The World Bank and Globalization The World Bank and Globalization Despite the World bank’s claims to have helped reduce poverty and improve living standards in developing countries, its activities have been criticized as paternalistic and secretive. The bank has been charged with complicity in genocidal policies, exacerbating ethnic conflict, increasing economic inequality, fostering environmental damage, and displacement of indigenous people in developing countries. The Dam at The Dam at Pak Moon The World Bank helped finance the building of a dam at Pak Moon on the Moon River in eastern Thailand in the early 1990s. The process of planning, constructing, and operating the dam was undertaken without obtaining input from the fishermen and villagers who lived along the river. The construction of the dam had a detrimental effect on the environment, flooding the adjacent fields and forests and violated the World Bank’s own policies on cultural property destruction which required a new environmental impact assessment and appropriate impact mitigation prior to the implementation of the project. Edible plants upon which the locals were dependent for nutrition and income were destroyed and a severe decline in the fish population occurred. The way of life of indigenous fishermen dependent upon abundant fish for food and income was annihilated. Approximately 1700 families had to be resettled due to the effect on local fisheries. Traditional communities began to disintegrate. Many of those affected by the dam project organized protests calling for the Thai government and the World Bank to take responsibility for the devastation caused by building the dam. In 2000 a report by the World Commission of Dams reported that the dam was economically unjustifiable, caused serious damage to the ecosystem of the Moon river, and destroyed villagers’ livelihood. Today, fishermen on the river can expect to catch 20 to 40 per cent of what could be caught before the dam was built. Villagers continue to seek the removal of the dam, although the Thai government has ordered some of the eight sluice gates opened to allow for increased fish migration. The Yerevan The Yerevan Water Supply In Yerevan, the capital of Armenia, where almost one­third of the population resides, the water utility delivered safe drinking water only on an intermittent basis. In 1998, the Government of Armenia received $30 million from the World Bank to help restore the Yerevan water utility . The government, contracted with ACEA, an Italian international water management company, to take control of the utility. ACEA was to complete necessary repairs and improvements so as to insure a continuous supply of safe drinking water over the course of four years. In May 2000, the World Bank funded Municipal Development Project (MDP) began its implementation and oversight of the project, but,as the first and second years of the project passed, complaints about unreliable service and contaminated water increased. In 2002, Yerevan’s Mayor insisted the project be terminated and the international operator be dismissed. Nonetheless, the project continued. In 2004, with complaints about water service and quality mounting, in addition to reports from contractors about project improprieties, an Armenian Parliamentary Commission initiated a detailed investigation into the MDP’s activities. The Commission’s year­long investigation revealed that the representative of the international operator ACEA, in collaboration with corrupt Armenian officials, had diverted project materials and equipment to commercial enterprises for personal gain. Further, the investigation showed that costly improvements to the system had been abandoned and replaced by improper for­profit schemes, that the ACEA representative had used his position to establish a network for the purpose of embezzling public funds, and that the World Bank did not oversee the project responsibly. The Commission reported its findings to the World Bank on several occasions, beginning in 2004. In its 2006 Implementation Completion Report (ICR), however, the World Bank not only falsely claimed that project objectives had been achieved, but also claimed that project goals had been exceeded. In fact, the ICR reported that the international operator had met impressive efficiency and reliability targets , although the World Bank Country Manager had been officially informed that the targets had been altered in such a way as to conceal what was actually an abysmal performance. In January 2007, a whistleblower with access to internal documents about the MDP obtained evidence showing that the General Director of the Yerevan Water and Sewerage Company (YWSC) in the capital and the international representative of the Italian company ACEA, contracted to manage and modernize the YWSC, were the same person during the crucial period between 2000 and 2002. As a result of the conflict of interest, the evidence showed that project objectives were changed without authorization, substandard materials were used, performance standards were lowered, and works to be completed were never undertaken. The whistleblower contacted the U.S. based Government Accountability Project (GAP) to support a request for an investigation by the World Bank’s investigative body, the Department of Institutional Integrity (INT). In May 2008, despite the INT being provided ample evidence of the activities in Yerevan, it declined to investigate. On June 1, 2005, Paul Wolfowitz, a former Bush Administration official, became president of the World Bank. Upon taking his position, Wolfowitz gave special emphasis to fighting corruption in the World Bank’s activities. Notwithstanding his commitment to address corrupt practices involving World Bank operations, member countries worried that a practice of suspending loans to countries on grounds of corruption was vulnerable to selective application in line with U.S. foreign policy interests. World bank shareholders directed Wolfowitz to revise the strategy to include objective measures for corruption and the Board approved a revised strategy in Spring 2007. After allegations surfaced that that Wolfowitz was imposing Bush Administration policies to eliminate family planning from World Bank programs and that he had engaged in unethical conduct involving the promotion and overcompensation of his girlfriend, Shaha Riza, a World bank employee, he resigned as World Bank Group president at the end of June 2007. Current Accountability Current Accountability The International Development Association (IDA) is the arm of the World Bank that makes grants and interest­free, long­term loans to poor countries around the world. In May, 2009, the World Bank’s own internal Independent Evaluation Group (IEG) concluded that IDA, which currently lends and grants about $10 billion annually to governments in Africa, Asia, Latin America, and Eastern Europe, did not protect its funds adequately from theft and diversion and lacked effective safeguards against corruption . Hybrid White Collar Crime Hybrid White Collar Crime Part 3 White Collar Crime CRJU E491W­ Fall 2011 William C. Smith Finance Crime Finance Crime Finance crime refers to the large­scale illegalities that occur in the world of finance and financial institutions. Finance crimes may be committed on behalf of major financial institutions, such as banks, or for the benefit of individuals occupying financially privileged statuses, such as investment bankers. Three important aspects of finance crimes distinguish them from other white collar crimes: Vast financial stakes are involved; single individuals or financial organizations may illegally acquire tens of millions, hundreds of millions, or billions of dollars. Although finance crime may have parallels with corporate crime and may be closely linked to corporations and finance networks, it has other dimensions as well. Finance crime directly threatens the integrity of the economic system itself. Financial Institutions Financial Institutions Substantial evidence shows that banks and other financial institutions from their earliest days have engaged in fraudulent activities and have unethically and illegally deprived their customers of significant amounts of more money. Much of the wrongdoing has come in the wake of lending activities of both commercial banks and thrifts. A thrift is an organization formed for the purpose of holding deposits for individuals, such as a savings bank or savings and loan association. The S&L Frauds The S&L Frauds The Savings and Loan scandal of the 1980s grew out of the desire of thrifts, usually local savings and loans associations, to compete more aggressively against banks and other financial institutions in the changing economic environment. Because S&L earnings were tied primarily to low interest fixed rate mortgages, they sought deregulation by Congress so that they could offer more attractive investment options to their customers. Congressional approval of their request resulted in their offering “bundled” loans, unsecured commercial loans, and unrealistically high interest rates on deposits, which they could not afford. Charles Keating Charles Keating The S&L problem began in 1980 when the government raised the federal deposit insurance on S&Ls from $40,000 to $100,000 even though the typical savings account was only around $6000. With the decreased regulation, many S&L executives, such as Charles Keating, saw an opportunity to enrich themselves at the expense of their depositors. The Federal Home Loan Band Board (FHLLB), which had regulatory authority over the S&Ls, began to worry about the risks of the deregulation trend, and proposed a “direct investment” regulation to limit the money S&Ls could direct to riskier investments. Keating was unhappy with the direct investment rule and began actively lobbying against it and asked five U.S. Senators, including John McCain, to all of whom he had made significant campaign contributions, to intervene with regulators from the Federal Home Loan Bank Board on behalf of his company, Lincoln Savings and Loan . Lincoln Savings and Loan collapsed in 1989, at a cost of over $3 billion to the federal government. Some 23,000 Lincoln bondholders were defrauded and many elderly investors lost their life savings. The substantial political contributions that Keating had made to each of the senators, totaling $1.3 million, attracted considerable public and media attention. After a lengthy investigation, the Senate Ethics Committee determined in 1991 that Alan Cranston, Dennis DeConcini, and Donald Riegle had substantially and improperly interfered with the FHLBB in its investigation of Lincoln Savings, with Cranston receiving a formal reprimand. Senators John Glenn and John McCain were cleared of having acted improperly but were criticized for having exercised "poor judgment". The Subprime Mortgage Collapse The Subprime Mortgage Collapse Banks and other lenders have often taken advantage of generally unsophisticated borrowers with modest incomes who needed to pay their bills or wanted to buy a house and discovered that “subprime loans,” loans to financially marginal people, could be very profitable. Subprime mortgage borrowers often discovered they had been misled on escalating interest rates and fees, and they ended up with monthly payments they could not afford. In some cases, the subprime borrowers attempted to consolidate their debts with new, high­interest mortgages. Fannie Mae and Freddie Mac Fannie Mae and Freddie Mac The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, was founded in 1938 during the Great Depression to provide liquidity, stability and affordability to the U.S. housing and mortgage secondary markets. Fannie Mae works with mortgage bankers, brokers and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates. The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, was created in 1970 to expand the secondary market for mortgages in the US. Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage­backed security to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases. In 2003 and 2004, Freddie Mac and Fannie Mae were investigated for various forms of accounting fraud. Both entities traditionally bought up billions of dollars of mortgages from commercial banks to enable them to make further loans; accordingly, they played a central role in American home ownership. In September 2008, in a costly bailout, the U. S. government took over Freddie Mac and Fannie Mae in the wake of the subprime mortgage market collapse. Both Fannie Mae and Freddie Mac had been pressured by Wall Street and Congress to buy up hundreds of billions of dollars of mortgage loans to risky borrowers. Evidence surfaced in August 2008 that the CEO of Freddie Mac rejected internal warnings about these risks and it was also reported that the accounting fraud problems were not successfully addressed, and Freddie Mac greatly overstated the size of its capital base. Insider Trading Insider Trading Insider trading can be defined as “buying or selling corporate stock by a corporate officer or other insider on the basis of information that has not been made public and is supposed to remain confidential.” Insider trading is illegal and occurs when someone knows important but secret information about a company and then trades that company's securities, based on the inside knowledge, to gain an advantage when the stock price moves after the information is made public. “Insider tipping” is also illegal and refers to the practice of telling others about secret stock­price­moving information. Michael Milken Michael Milken Michael Milken, after graduation from the Wharton Graduate School of Business at the University of Pennsylvania in 1969, joined the Wall Street investment firm that would become known as Drexel Burnham Lambert. While at Drexel, Milken formed a high­ yield bond trading department, which specialized in the handling of so­called “junk bonds” (i.e. a non­investment grade bond that has a higher risk of default but which pays a higher yield). The sale of the bonds allowed Milken to raise large amounts of money quickly for those seeking investment capital. Milken’s money­raising ability also facilitated the activities of leveraged buyout (LBO) firms like Kohlberg Kravis Roberts and arbitrageurs like Ivan Boesky. Boesky was under investigation by the SEC for numerous violations and pleaded guilty to securities fraud as part of a larger insider trading investigation. As part of his plea, Boesky implicated Milken in several illegal transactions, including insider trading. Boesky’s statements resulted in an SEC probe of Drexel, as well as a separate criminal investigation by Rudy Giuliani, the United States Attorney for the Southern District of New York. The SEC investigation and federal criminal investigation resulted in the discovery of an entity called MacPherson Partners, which had acquired several options for the stock of a company which was the subject of a leveraged buyout which would likely raise the value of the company’s stock, information not available to the public. MacPherson Partners consisted solely of Milken and several other Drexel partners and its existence was not known to Drexel management. In 1989, Milken was federally indicted on 98 counts of racketeering and securities fraud as the result of the insider trading investigation. The indictment accused Milken of a litany of misconduct, including insider trading, the concealment of the real owner of a stock, a practice known as stock parking, tax evasion and numerous instances of repayment of illicit profits. After a plea bargain, he pled guilty to six securities and reporting violations but was never convicted of racketeering or insider trading. He was sentenced to ten years in prison and permanently barred from the securities industry by the Securities and Exchange Commission, but the presiding judge, in consideration of his cooperation, reduced the sentence to less than two years and a $200 million fine. Today, Milken is the founder of medical philanthropies funding research into melanoma, cancer and other life­threatening diseases. In a November 2004 cover article, Fortune magazine called him "The Man Who Changed Medicine" for his positive influence on medical research. He has a net worth of approximately $2.1 billion and, in 2007, was ranked by Forbes magazine as the 458th richest person in the world. ...
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This note was uploaded on 02/20/2012 for the course CRJU E491 taught by Professor Mr.smith during the Fall '11 term at South Carolina.

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