2 Crime Crime: Positive or negative action that violates a penal law Not civil lawAct against a state or federal governmentCongress and state legislatures decide the criminality of actions and determine penaltiesSeen more and more in the business contextComputer and technology have created new versions of old criminal lawse.g. Unauthorized entry into computer systems is the new version of the old breaking and entering laws
3 Crime Categories Felonies more serious than misdemeanors Classifications (Class A, Class B) and degrees (1st, 2nd, 3rd degree) denote seriousness of criminal chargeViolent crimes – murder, armed robbery, assaultNon-violent victim crimes – vehicle theft, burglariesVictimless crimes – possession of illegal drugsWhite collar crimes – embezzlement, bribery, fraudPunishment depends on the category under which a person is convicted (plea bargains)
4 Crimes & Elements of Crimes Government agencies decide who will be charged with a crime.Prosecutors receive reports of alleged crime, & results of investigation.Prosecutors then decide whether or not to bring charges.Not all claims of criminal activity are investigated.Politics & personal preference may come into play in decisions by prosecutors.Process is not perfect.Requirements for prosecution:Actus reus – the guilty actMens rea – criminal intent
5 Commonwealth v. Angelo Todesca Corp. Gauthier drove truck full of asphalt for Angelo Todesca Corp.To a highway construction site near a busy intersection.Police officer directing traffic killed as Gauthier backed up to deliver asphalt.Back-up horn on the truck was not working.Gauthier and Todesca knew horn wasn’t working – Violation of company safety procedures.Gauthier was charged with driving offices: fined and driving limitedMassachusetts charged Todesca w/vehicular homicide.Jury convicted company and fined $2,500.Appeals court reversed the conviction. Commonwealth appealed.(continued)
6 Commonwealth v. Angelo Todesca Corporation, cont. Must prove that Gauthier had power, duty, responsibility & authority to act on behalf of corporation for business he was doing.And that he committed a criminal act while acting for corporation.To prove corporation is guilty of criminal offense, must prove:#1) individual committed a criminal offense;#2) at the time of committing offense, person “was engaged in some particular corporate business”; AND#3) individual had authority to act for corporation on its behalf to carry out particular business when offences occurredTodesca claimed corporation can’t be involved in motor vehicle homicide since “corporation” cannot “operate” a vehicle.HELD: Judgment of trial court affirmed. Because corporation is not a living person, can only act through its agents. To hold otherwise would mean corporations would never be liable for any crime.Corporations can be held criminally liable for acts performed by employees “within the scope of their employment” and “on behalf of the corporation.
7 Defenses Statute of Limitations runs (time varies by crime) Statute of limitations can “toll” to stop the running of time (e.g. if criminal flees country to avoid prosecution)Affirmative Defenses: Even if prosecution’s claims are true, other facts prevent the claims from constituting the crime.Improper procedure in the criminal prosecutionAction was justifiable, i.e. self defense with reasonable forceSelf-defense in violent crimes cases (use of force justifiable to protect oneself against another)Entrapment (Law enforcement sets a trap to lure someone into committing a crime he/she had no intention of committing – this can be a little tricky as a defense).
8 Evidence Strict standards for gathering and presentation at trial Evidence was handled properlyCalled “chain of custody”If improperly obtained or presented, evidence is excluded (under procedural due process)Called the exclusionary rule4th Amendment protectionMay be referred to as “fruit of the poisonous tree”Authorities maySearch propertySeize documents and other physical itemsWarrants usually needed for search of property, persons, or seizure of property. (“Hot pursuit” exception.)Warrant issued by a judge or magistrateLaw enforcement officials must show probable cause to a judge to obtain a warrant.See United States v. Young
9 United States v. YoungUnder IRS regulations fuel may be sold tax free if for marina use.Marinas sell tax-free by obtaining a “647 certificate” from the IRS. Young obtained a certificate for his marina.IRS believed he sold fuel in cash deals to truck stops and service stations that should have paid taxes on fuel.IRS believed Young shipped money he made by FedEx.FedEx let the IRS x-ray packages shipped by Young. Cash seen. IRS then obtained a warrant to seize and open Young’s packages – there was the suspected cashYoung moved to suppress evidence because IRS did not obtain a warrant to x-ray FedEx packages.Trial court rejected Young’s motion; he was convicted. He appealed.(Continued)
10 United States v. Young HELD: Judgment affirmed. No reasonable person expects to retain privacy after signing an air bill warning of carrier’s authorization to inspect packages.FedEx told customers (1) do not ship cash, and (2) we may open and inspect your packages at our option.Young had no expectation of privacy of packages being x-rayed by IRS agents with FedEx permission.Young assumed the risk that FedEx might consent to a search.No offense to Young’s 4th Amendment rights.
11 Prosecution ProcessOccurs when prosecuting attorney has enough evidence to make criminal chargesWill be either a misdemeanor or felonyIn some cases, a grand jury will review a potential felony case.If grand jury determines probable cause, usually it will issue an indictment against the accused.
12 Arraignment Accused placed under arrest based on a warrant. In non-violent matters, accused may turn herself in, rather than be taken into custody by the police.Suspect is “booked” at police station, photographed, finger printed and searched.Chance given to the accused to contact an attorney.Arraignment: court appearance before judge or magistrate.Accused may plead guilty, nolo contendere (no contest), or innocent.Judge may release accused or require bail and will set a court date.Violent criminals, or those who court fears might flee before trial are held without bail, or bail is set very high.Often defendants plea bargain – pleads guilty to charges or lesser charge or pleads no contest in exchange for agreed punishment.
13 Discovery Civil Litigation: Reduce surprises Both sides must turn over anything requested by other sideCriminal Law Cases: Parties do own investigations & disclose only subset of what is found to the other side prior to trialLaw enforcement may be conducting investigation that defendant knows nothing about.Prosecution must disclose any exculpatory evidenceEvidence which might show defendant is not guiltyThe choice to disclose left up to prosecutions lawyersDefendant in criminal case has no obligation to disclose to prosecution evidence showing guilt5th Amendment protects defendantsRight before trial, sides exchange witness & exhibits lists.Prosecutors often “play chess and the defense plays street hockey.”
14 TRIALTRIAL: If matter goes to trial, government attorney (often district attorney) presents prosecution’s case.Defendant must be found guilty “beyond a reasonable doubt”.If jury finds defendant innocent – end of matter.Double jeopardy prevents a defendant from being tried a 2nd time for same criminal charges.If jury can’t agree on verdict, there is a mistrial, and prosecutor will decide whether to proceed again.If guilty, there may bePrison timeJail timeProbationFinesRestitution to victim
15 White Collar Crime1939 origin of term: “Crime committed by a person of respectability and high social status in the course of his occupation.”Criminal activity for financial advantage occurring in business.FBI estimates such crimes create $1/3 trillion in losses each year.Most cases are against individuals; corporations may also be prosecuted.Antitrust: Violation under the Sherman Act and Clayton Act.Prison terms involved in price fixing and anti-competitive practicesBankruptcy Fraud: Person or corporation hides or lies about assets in bankruptcy proceeding (also applies to creditors giving false information or illegal pressure to bankruptcy petitioners).Bribery: Offer or taking of money, goods, services, etc. to influence official actions or decisions.Counterfeiting: Copying of genuine items without authorization – money, designer clothing, other products.Credit Card Fraud: Unauthorized use of a credit card.
16 White Collar Crime Computer and Internet Fraud: Credit card fraud involving a computer/internetUnauthorized access to financial accountsUnauthorized use of computers and computer filesSabotage of computersEconomic Espionage: Theft or misappropriation of valuable business information, such as a trade secret.Embezzlement: Person in position of trust takes money or property for his/her own use.Environmental Law Violations: Federal (EPA) and state lawsData fraud cases, e.g. private laboratories submit false environmental dataHazardous waste dumpingOcean dumping by cruise shipsOil spillsInternational smuggling of CFC’sIllegal handling of hazardous substances (asbestos, etc.)EPA averages 300 criminal prosecutions per year years of prison and jail time.
17 White Collar CrimeFinancial Fraud: Regulation of banks and financial institutionsFirms and employees subject to criminal liabilityFraud in loans, financial documents, mortgages, etc.Government Fraud: Governs contracts with public agenciesBilling for goods not deliveredDouble billingInferior goodsGovernment payment programsFarm subsidiesPublic housingEducational programsHurricane Katrina disaster in New Orleans – convictions of fraud in collecting benefits intended for victimsHealthcare Fraud: Over-billing and scams by hospitals, doctors ambulance services, laboratories, pharmacies, extended care facilitiesInsider Trading: Person trades a security while in possession of material, non-public information.
18 White Collar CrimeInsurance Fraud: Insurance companies commit fraud, charging higher rates than allowed by state regulators.Policy holders lie about property to get lower rates.Policy holders pad their claims to get more money.Mail Fraud: Sending of fraudulent materials through U.S. Postal Service or using the U.S. Postal Service to communicate fraudulent activities.Money Laundering: Hiding the truth about the origins of money, especially illegal activities. Obligation to report income even from illegal income for tax purposes.
19 White Collar CrimeRacketeer Influenced and Corrupt Organizations (RICO) ActOriginally an extra weapon against organized crime, esp. Mafia.Racketeering originally meant activities, such as bribery or extortion.Modern meaning: broadened the term to include activities such as mail fraud, etc.Successful RICO claim receives triple actual damages + attorneys’ fees through civil claimsNow include mail and wire fraud as crimes under RICOGovernment can seek injunction seizing defendant’s assets, preventing their transfer or require defendant to post a performance bond.Government may press for imprisonment for criminal violations.Complicated and unpredictable area of the lawIs now used in suits against persons, businesses, political protest groups and terrorist organizations
20 Bridge v. Phoenix Bond & Indemnity Co. Cook County, Illinois holds public auctions for tax liens on tax delinquent properties. Bridge and Phoenix compete to buy liens.County requires buyers to submit bids in their own names. Cannot use “agents, employees or other related entities” to submit bids for property by disguising the real bidder.Phoenix sued Bridge for getting tax liens by filing false documents through others. Phoenix lost possible tax lien purchases to Bridge.Claimed Bridge and other bidders violated RICO through racketeering involving mail fraud by sending false documents for tax lien purchases.District court dismissed RICO claims. Plaintiffs were not protected by mail fraud statute since scam was not directed at them.If there was a scam, it was directed at Cook County & property owners (not plaintiffs) and they could have a cause of action.Appeals court reversed in favor of plaintiffs.Defendants appealed to Supreme Court.
21 Bridge v. Phoenix Bond & Indemnity Co., cont. HELD: Judgment of Court of Appeals affirmed in plaintiff’s favor.Plaintiff asserting RICO claim based on mail fraud need not show that it relied on defendants alleged misrepresentations.The basis of mail fraud is a mailing that furthers a scheme to defraud – even if the mailing does not contain false information.Here, mail was used to submit false attestations of compliance with the Bidder Rule to the County.RICO is strictly construed.Congress can change the statute, but Court will not make interpretations to the statute and change RICO’s strict outcome.Plaintiff may assert RICO claims.
22 White Collar Crime Securities Fraud: Different kinds Insider trading gets a lot of pressMarket riggingTheft from accounts of clients of securities firmsSee chapter on Securities RegulationTax Evasion:Failure to file tax returnsFailure to report incomeOverstatement of expensesNot reporting illegal incomeInvestigations carried out by 20,000 + IRS agents~ 2000 cases persons imprisoned for tax fraudOnce indicted – 90% likelihood of convictionSee Issue Spotter: “Internal Fraud”
23 White Collar CrimeWire Fraud: Any electronic communication involved in illegal activities (much like mail fraud & telephone/internet fraud)Traditionally would have been subject only to state prosecutionNow basis for federal prosecutionA sweeping nature to the statutes seen in casesIncludes “a scheme or artifice to deprive another of the right to honest services”Refers to bribery or kickbacks, not rather vague failure to provide “honest services.”Pasquantino v. U.S.: American bought liquor in U.S. and smuggled it into Canada for resale, avoiding high Canadian taxes.Since electronic communications were used that originated in the U.S., two people sent to prison for 5 years each in the U.S.
24 Business Implications From Money Laundering Example of obligations created in normal business operations$1 to $2 trillion laundered worldwide each yearMoney laundering is taking proceeds of criminal activities (i.e. drug smuggling) & transforming cash in the appearance of legitimate business.Doesn’t attract law enforcement attentionTony Soprano ExampleTony Soprano earns $1 million from loan sharking and drug dealingHe creates Soprano Coin Laundry, Inc.Deposits cash into corporate bank account as income from laundryPays himself a salaryLooks like legitimate income
25 Regulations Aimed to Discover Money Laundering Consequences for Non-ComplianceAnti-money Laundering Measures (“AML Measures”)Regulations making money laundering more difficultSoprano’s banks must comply with federal regulations, reporting, etc.Require financial organizations to use Know Your Customer (KYC) or Customer Due Diligence (CDD) ProgramsTrack It Down: Tracing asset flows – large cash transactions are suspectWho Is Up to What?: Reporting suspicious transactions – cash deposited over certain amounts ($10,000)Failure to File suspicious activity reportCivil/criminal penalties, or bothCivil penalties – willful violation of reporting requirementsCivil penalties can be up to the greater of the amount involved in a transactionWillful violations may lead to criminal penaltiesFines up to $250,000 or 5 years in prison
26 Sentencing Guidelines and Compliance Controversial aspect of federal criminal lawCongress mandated that courts follow rules about imposing sentences for criminal law violations.Sentencing Commission created a list of factors to consider for each conviction.Punishment reduced under the Sentencing Guidelines when a firm has a program in place to ensure problems won’t happen again.DOJ has Guidelines for effective compliance programs.Some companies have traditional accounting and financial reporting to audit committees.Other companies hire an outsider to be on the compliance committee.Companies have whistleblower hotlines to encourage tips.Some European countries, such as France, prohibit hotlines. Person accused of crime has right to know who complained.Supreme Court held: Guidelines are advisory, not mandatory, for judges to use, but judges must follow them closely.
27 United States v. YoungYoung, cattle rancher, and McDonnell, an accountant, involved in cattle business for over 10 yearsSolicited funds to invest in their cattle operations. Represented to clients and banks they had 343,000 head of cattle; but had only 17,000Price of cattle fell; scheme collapsed; Young and McConnell closed the business; filed bankruptcyInvestors lost $147 million; banks lost $36 million; only $16 million was recoveredIndicted, but cooperated with investigators; entered plea agreements – admitted to mail fraud, making false statements and other violationsSentencing Guidelines were applied: Young sentenced to 108 months and McConnell to 87 monthsThey appealed; Guidelines had been applied too harshly and their sentences should be reduced. Sentences had been “enhanced” because they endangered the solvency of financial institutionsDefendants said they had no knowledge of this possibility.(Continued)
28 United States v. Young, cont. HELD: Affirmed. Sentencing properly applied.Defendants’ sentences were well below the applicable statutory maximum – not even 1/3 of maximumBecause of the millions invested, it was foreseeable to defendants that their investors would borrow money from banks, using the cattle that they supposedly bought as collateral.Banks performed inspections in an effort to ensure the security of collateral backing, and were defrauded.Defendants knew that consequences of their fraud would extend beyond their own banks and individual investors to the investors’ banks as well.