110TH INTERNATIONAL TRAINING COURSE VISITING EXPERTS’ PAPERS

ECONOMIC AND THE GLOBAL ECONOMY: UNDERSTANDING THE THREAT AND IDENTIFYING EFFECTIVE ENFORCEMENT STRATEGIES AND COUNTERMEASURES

John D. Arterberry*

I. THE GLOBALIZATION OF and prosperity of global commerce. Those ECONOMIC CRIME of us in law enforcement face an urgent challenge: effectively countering this global “Laws stop at borders, but crime does not.” crime wave by overcoming barriers Speaker at 1997 World Economic Forum, presented by institutional rigidity and Davos, Switzerland national political considerations. During the 1990s, we have witnessed the A. Defining the Threat emergence of the Global Economy from a Often termed “white collar” or “financial” largely theoretical concept, to a vital and crime, economic crime inflicts its harms in growing force in the affairs of nations. many ways. Most directly, there are the Evidence of that growth can be found in financial losses suffered by victims. the airline industry. According to a recent Other harms are less apparent. At a news report, passenger volume in meeting of police officials from 23 countries international commercial flights soared in September, attendees were told that the from 26 billion passenger miles in 1960 to investment by criminals of their illicit 3.5 trillion miles in 1990. funds in the world economy is generating annual profits of some $500 billion, about While the Global Economy has 2% of the global financial activity. These developed, we have experienced a funds may not only corrupt otherwise corresponding globalization of crime. legitimate enterprises through which they Whether engaged in traditional organized flow, but also provide seed money for new crime activities like narcotics trafficking or and more damaging . sophisticated economic like the BCCI scandal, criminals and their crimes 1. A Menu of Economic Crimes now show no respect for political Economic or white collar crime presents boundaries or geographic barriers and itself in many forms. The crimes range exploit the jurisdictional complexities both from investment frauds that target the life to expand and to conceal their crimes. savings of senior citizens to sophisticated frauds that use computers to divert Increasingly, experts and leading law bank funds to hidden accounts. No matter enforcement officials are sounding the degree of sophistication, there will warnings about the threats posed by the always be common elements in the crime: globalization of crime. Economic crime lying, cheating or stealing will be at the stands at the forefront of this new wave of heart of the scheme. lawlessness that threatens the stability

* Deputy Chief, Fraud Section, Criminal Division, United States Department of Justice, U.S.A.

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(i) Financial Institution Fraud by legitimate insurance companies. During the 1980s and 1990s, Arson for profit, staged accidents financial institution fraud has been creating sham-injury and property a prominent and persistent problem. damage claims, and inflated In the United States, we experienced automobile body repair bills are a crisis in our savings and loan examples of schemes aimed at the industry that resulted, in part, from insurance companies. pervasive fraud and other abuses requiring a massive government Alternatively, insurance response. To date, the federal businesses may simply be a clever government has suffered losses in facade for massive fraud schemes. excess of $200 billion resulting from Unscrupulous promoters will the savings and loans (S&L) debacle. establish insurance operations using “rented” or fraudulently inflated Although the S&L crisis is behind assets to satisfy government- us, financial institution fraud established capitalization and continues to be an economic crime reserve requirements. These priority for the federal government. operations often use off-shore shell inflicts losses entities to facilitate and conceal their estimated at $60 billion each year. frauds. The perpetrators collect fraud involving counterfeit policy payments from unsuspecting is conducted by organized individuals and businesses before rings that range across the United abruptly ceasing operations and States and cause losses to of departing with the scheme proceeds. about $6 billion yearly. (iii) Government Program Fraud On a more global dimension, the Government programs and BCCI scandal demonstrated the operations also are vulnerable to vulnerabilities in regulation of fraud. Dishonest claimants in multinational financial instruction. government social welfare programs It also demonstrated the benefits undermine citizen support for this obtained through international effort and cause losses to the cooperation. Even though its citizens taxpayers of billions of dollars each were not victimized, the United year. States successfully prosecuted BCCI for defrauding its banking regulators. Health care presents a dramatic Through that prosecution the United example of this problem. In the States has forfeited more than $1 United States, health care has billion of BCCI-controlled assets, an government programs and private action that has enabled the world sector components that are equally community to compensate many of susceptible to fraud. In addition to the individual depositor victims. individual, corporate and private insurance expenditures for health (ii) care, the federal government provides Insurance fraud schemes may various health care programs that victimize either the insurer or the entail federal outlays of hundreds of insured. Many schemes seek to tap billions of dollars annually. the immense reservoir of assets held

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Some estimates place spending on than the credit card. Accepted health care in the United States at universally, the credit card has more than $1 trillion each year, and revolutionized commerce and as much as 10 percent of that amount, transformed business and personal or about $100 billion, resulting from travel. The credit card industry fraud and related abuses. With such tallies billions of dollars in worldwide enormous sums of money spent each commerce annually. On the negative year, it is not surprising that frauds side, the industry suffers billions of have proliferated. dollars in fraud losses each year. Visa in the United States thus has alone acknowledged in 1997 annual emerged as one of the most serious worldwide fraud losses at well over domestic crimes in this decade. $700 million.

The Department of Justice has Closely akin to credit card frauds instituted an aggressive enforcement are schemes in which victims’ campaign against health care fraud. identification is appropriated by Convictions in health care fraud cases criminals and used to obtain funds have increased over 300 percent since and property through credit cards Fiscal Year 1992 and hundreds of and bank accounts. Approximately millions of dollars have been returned 25 percent of credit card losses in the to the federal treasury through these United States can be traced to this prosecutions and related civil cases. relatively new crime known as “”. Identity thieves (iv) Commercial and Foreign obtain, through various fraudulent Corrupt Practices means, the personal identifying data In the private sector, one of the of their victims, including names, most corrosive and costly abuses is addresses, telephone numbers and commercial bribery. Businesses are federal Social Security numbers, victimized by dishonest employees which they then employ to gain who, in exchange for bribes, cause unauthorized access to bank and their companies to purchase defective credit card accounts. A consumer goods, enter into inflated or bogus magazine reports that more than contracts or otherwise cheat their 1000 cases of identity theft occur each employers. day in the United States. Just this year, federal law was amended to Closely related to commercial address this abuse. bribery is bribery of foreign officials by corporations seeking to obtain or (vi) Securities/Investment Fraud retain business in foreign countries. Investment and In the United States, the Foreign blossomed during the boom years of Corrupt Practices Act expressly the world’s equities markets in the prohibits such conduct. Efforts are late 1990s. The mutual fund industry underway to obtain international in the United States, with assets of agreement on similar prohibitions. about $5 trillion, is now larger than the nation’s banking industry. (v) Nothing symbolizes the global The euphoria created by enormous economy in personal terms better gains in the market prices of

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securities has led investors to discard II. COMBATING ECONOMIC caution and place their hard-earned CRIME: STRATEGIES AND funds, often representing their COUNTERMEASURES FOR AN retirement savings, to promoters who EFFECTIVE GLOBAL RESPONSE promise unrealistic profits to their A. Criminal Enforcement Measures victims. The securities industry Success in fighting white collar crime estimates about $6 billion annually requires a focused and coordinated in investor losses to securities fraud response that blends the domestic effort in the United States. with the broader international response. On the domestic front, available resources 2. Costs of Economic Crime must be applied to the most pressing Beyond the direct losses inflicted by economic crime problems. These priorities fraud, which total in the tens of billions of can be set through a consultative process dollars each year, there are less apparent that includes the investigative and costs. For example, businesses incur prosecutive authorities, as well as all substantial expenses stemming from relevant government departments and efforts to prevent and detect fraud. These agencies. precautions include comprehensive audits, large security staff, and sophisticated International cooperation and mutual monitoring and other high-tech preventive legal assistance treaties and agreements measures. An official of a private security are essential tools in fighting global firm stated, in remarks at an international economic crime. As countries focus their conference, that there has been an attention on transnational crime, the need explosion in the private security industry, to modernize the methods by which we which currently employs 1.6 million obtain legal assistance from other individuals and consumes $65 billion in sovereigns becomes more apparent. resources. The speaker estimated that by the turn of the century the industry will 1. Domestic Strategies grow to $100 billion and employ 2 million (i) Investigative Techniques persons. Ultimately, these costs are passed During the past two decades, the on to the consumer or are absorbed by Department of Justice has businesses as profit reducing expenses. formulated varied approaches in investigating and prosecuting Fraud also exacts less tangible losses. economic crime. We have moved It distorts the flow of commerce and away from the traditional practice of disrupts the development of global trade. strictly separating investigators and Its staggering costs stifle developing prosecutors. Instead of keeping the economies and can undermine the stability prosecutor away from the of banks and other commercial enterprises. investigative process, we regularly Economic crime, simply stated, is one of the team agents and prosecutors to greatest threats to the realization of a investigate cases jointly. This vibrant and healthy global economy. encourages closer collaboration and consultation in developing an investigative plan and leads to more expeditious completion of that phase in the development of a criminal case. At the same time, this collaboration

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ensures that promising avenues of not only reduces the burden of investigation are not overlooked, that preparation and presentation for the successful strategies for prosecution prosecutor but also facilitates a better are fully exploited and that legal understanding of the case and the pitfalls are avoided. evidence by the adjudicatory body.

Undercover operations (UCOs), Prosecutors and investigators may originally developed as a means of be grouped together in specialized infiltrating traditional organized units, or task forces, to concentrate crime groups like the Mafia, are now on a particular economic crime an important part of our arsenal of problem. Task forces proved anti-fraud weapons. UCOs are especially effective in addressing the especially valuable in exposing frauds uncovered during the savings corrupt firms and individuals and loans (S&L) crisis in the United imbedded in regulated sectors of the States earlier in this decade. economy. UCOs provide additional deterrence by keeping the criminal Denying criminals the fruits of element off balance. White collar their crimes through the forfeiture of criminals can never be certain that their assets is one of the most the apparent collaborator may not dramatic and effective economic actually be an undercover agent crime prosecutive tools to gain ready to expose their criminal prominence during the 1990s. activity. Forfeiture eliminates the profit in crime and also serves to remove (ii) Prosecutive Strategies valuable instrumentalities of crime, Prosecuting economic crimes whether aircraft, office buildings or presents many challenges. The the criminals themselves. schemes are often complex and potentially confusing. Thus, At the end of 1997, approximately presenting the evidence necessary to $450 million had been deposited into prove criminal conduct may require the Department of Justice Asset numerous witnesses and voluminous Forfeiture Fund. The funds are documentary exhibits. shared with state and local law enforcement agencies to supplement Experience gained by federal their crime-fighting assets. In prosecutors over the past decade addition, the fund assists in suggests that there are certain compensating crime victims. strategies that significantly enhance prospects for success. For example, 2. International Strategies charging decisions can sharpen the Established and predictable theory of prosecution and reduce mechanisms for obtaining evidence from some of the evidentiary burdens foreign jurisdictions is essential to fighting inherent in these cases. Rather than economic crime on the international front. focusing charges on the entire episode Mutual legal assistance treaties (MLATs) of criminal conduct, our experience are one of the most common means of has shown that selecting the most achieving this goal. Rather than relying egregious acts or those transactions on the cumbersome process of letters for which the evidence is strongest rogatory, which invokes time-consuming

143 RESOURCE MATERIAL SERIES No. 55 diplomatic processes for conveying (ii)Regulation of Currency Transactions assistance requests, nations are turning Because money laundering increasingly to the MLAT to ensure that facilitates criminal activity, Congress borders are not barriers to pursuing enacted statutory provisions that economic criminals. create a paper trail for currency that resembles the document trail created Treaties for extraditing individuals by other financial transactions charged with economic crimes are being involving bank cheques and money renegotiated in order to incorporate, as wire transfers. Essentially, the covered crimes, more modern versions of legislation creates reporting fraud and related offenses that may not requirements when currency enters have existed in domestic law when the or leaves the country and whenever treaties were first executed. cash transactions take place at banks and certain other businesses. (i) Regulation A key component in combating On the international level, several economic crime is effective organizations are engaged in regulation. Regulation helps by sponsoring money laundering suppressing practices that invite or enforcement programs. The conceal fraud. Regulation can also Financial Action Task Force (FATF), deter migration of undesirable an organization comprising of individuals into positions of trust or twenty-six nations, issued revised substantial financial responsibility. recommendations in 1996 that broadened the scope of the original In the United States, all federally recommendations to include monies insured financial institutions are derived from all serious crimes and required by law to file reports with to mandate the reporting of law enforcement agencies whenever suspicious transactions by financial they have reason to believe that institutions. FATF also conducts crimes may have occurred at the mutual evaluations and assessments institutions. The federal bank of member states’ anti-money regulatory agencies recently revised laundering measures by the reporting procedures to representatives from fellow incorporate the benefits of members. information technology. Under the revised system, known as the The United Nations Global Suspicious Activity Report (SAR) Program Against Money Laundering system, the reports are filed at one (GPML), based in Vienna, Austria, central point where they are entered uses technical cooperation and into a computer database. Law research projects aimed at providing enforcement agencies access the SAR member states with the means to database and retrieve all SARs for combat money laundering. GPML their respective jurisdictions. In is working with other international addition, the computerized database organizations to develop an Internet enables law enforcement and website on money laundering regulatory agencies to analyze the matters, including a database of law SARs and identify emerging crime and regulations. trends.

144 110TH INTERNATIONAL TRAINING COURSE VISITING EXPERTS’ PAPERS

A relative of the credit card, the tomorrow’s frauds will continue to embrace stored value or smart card, may advances in technology and to exploit gaps someday replace currency entirely. created by the absence of international But the stored value card adds agreements and coordination. another dimension to money laundering. Simply loading the (i) stored value card with a value of $5 Cybercrime, a term that has come million in credit renders it the to embrace computer-related crime functional equivalent to several and other high-tech offenses, seems suitcases of hard currency. certain to be the crime of the next decade. Computers may be used as (iii)Coordination and Working Groups a storage or communications device The presence of government in the execution of a fraud scheme. regulation is an important step in As an example, a fraudulent helping to protect an industry or telemarketing firm could store names sector of a country’s economy. To and relevant data concerning maximize the benefits of regulation, prospective victims to be telephoned however, another ingredient must be in a systematic execution of the added, coordination with the law scheme. enforcement community. We have found that interagency bodies, which Computers may be used more we call working groups, are an directly in the scheme as an effective means of developing and instrumentality of crime, a tool maintaining that coordination. For facilitating the fraud. For example, example, during our recent savings personal computers have been used and loan (S&L) crisis, we relied successfully to gain unauthorized heavily on our national Interagency entry into bank computer systems Enforcement Working and then to transfer bank funds to Group to ensure that our law accounts controlled by the cyber- enforcement and regulatory criminals. communities were working in tandem to fight fraud against our The computer also serves as a weapon financial institutions. In addition to for the theft of data, telephone or computer the Bank Fraud Working Group, the services, or for damage to computers and Department of Justice currently communications systems. Recent media maintains at least five other working reports described precautions being taken groups for insurance, health care and by some governments against the threat , as well as for of a computer terrorist attack on vital parts money laundering and securities and of a country’s infrastructure. commodities fraud. B. Effective Countermeasures III. TRENDS AND STRATEGIES 1. Prevention The United States Attorney General has A. The Challenges of the Next placed high priority on crime prevention. Decade In the white collar crime arena, this is an Many of today’s fraud schemes are especially cost-effective approach to simply repackaged versions of classic fighting crime. It has great potential not frauds. We can expect, however, that only to prevent billions of dollars in fraud

145 RESOURCE MATERIAL SERIES No. 55 losses but also to conserve precious law UNAFEI, operate under the auspices of the enforcement resources. United Nations. Others are based on regional or economic relationships. Crime prevention enlists the private Although their precise missions may differ, sector and citizens in the campaign to fight all of these organizations share one economic crime. The preventive measures common goal, ensuring that borders do not need not be expensive or rely heavily on remain barriers to effective law high-tech solutions. Our experience with enforcement cooperation. prevention programs suggests great promise. For example, the banking 3. Training industry, plagued by mounting losses from Training is an essential ingredient in counterfeit cheque schemes, recently mounting a successful law enforcement adopted a straightforward preventive response to economic crime. White collar measure. When a non-customer seeks to criminals are clever and resourceful and cash a cheque, the bank requires that the often operate in sophisticated segments of non-customer place his/her fingerprint on industry and finance. Moreover, many the cheque using an inkless fingerprint white collar crimes occur in regulated pad. In states in which this practice has business environments. Investigators and been adopted, cheque fraud has been prosecutors require specialized training in reduced by 60% or more. order to navigate these difficult areas.

Credit card companies are experiencing Commerce is exploding on the Internet. success in fighting fraud through the use Stocks can be bought and sold, of neural network technology that uses merchandise and airline tickets purchased, computers to track individual cardholder and banking transactions conducted from spending habits. Visa reported this year the home personal computer. Our law that fraud, as a percentage of volume, enforcement agencies must expect financial reached an all-time low in 1997 as a result crime to gravitate to the Internet as it of the neural network and related fraud becomes the global marketplace. Thus, detection measures. “Smart” cards, the investigators and prosecutors will face next generation of credit cards, employ difficult issues, both technical and legal, embedded computer chips to store a wealth as we confront cybercrime. Only through of information about the cardholder, formal, structured training programs will including biometric information that we be able to develop the necessary includes the cardholder’s physical expertise to meet the challenge. characteristics. IV. THE FUTURE : PROMISING OR Government benefit fraud has been PROBLEMATIC? reduced through the use of electronic As we prepare to enter the new benefit cards that create a computer trail millennium, the law enforcement to detect illegal usage of the welfare community faces the dual challenges of benefits. ever-evolving economic crime and technological innovation that constantly 2. International Cooperation accelerates the pace of change in the Global The Global Community has come to Economy. Technology serves as a powerful realize the critical need for coordination tool in the hands of criminals, but it also and cooperation in meeting the threat of can be a devastating weapon against these global economic crime. Some groups, like same criminal forces. Through training

146 110TH INTERNATIONAL TRAINING COURSE VISITING EXPERTS’ PAPERS and professional development of investigators and prosecutors, the law enforcement community can continue to suppress the global white-collar crime threat. International cooperation and coordination are central to enforcement responses and to ensuring that a tidal wave of global crime does not engulf the many benefits of the Global Economy.

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