E. F. Hutton the Bank’S Total Assets

E E. F. Hutton the bank’s total assets. Internal auditors who were told to monitor the Hutton account wondered why ANYONE OLD enough to remember the heyday of the amounts were so large when Hutton’s local of- E. F. Hutton remembers their ad, “When E. F. Hut- fice employed only four people. ton speaks, people listen” in which entire city Within nine days of opening the Genesee ac- blocks fell silent to hear the pearls of financial ad- count, Hutton had deposited $26,427,507 in vice spoken by in whisper by a Hutton client. Chief checks. The 11 checks had all been written by Hut- Executive Officer Robert M. Foman was so enam- ton on its accounts at United Penn Bank in Wilkes- ored of Hutton’s image that he built a 29-story, Barre, Pennsylvania, and American Bank and Trust $100 million headquarters in Manhattan, New Company in Reading, Pennsylvania. Hutton was in- York City, that some people called a memorial to explicably moving funds among the three banks. corporate greed. Within that same nine-day period, Hutton had writ- People stopped listening to Hutton, however, ten numerous checks on the Genesee Bank totaling after discovering that the company had been en- $26,432,000, resulting in an overdraft of $4,493. gaged in a systematic effort to avoid paying interest After additional checks arrived at the Genesee on short-term bank loans through a complicated Bank, officials checked with United Penn Bank and scheme of check kiting. The scheme came to light in learned that Hutton had funds to cover one but not December 1981 when Hutton gave in to the pleas of both of two checks written on December 8 for the Batavia, New York, branch of the Genesee $6,000,000 and $8,000,000. County Bank and moved accounts for its local of- Later that day, Hutton also deposited a check fice from the Marine Midland Bank to the small, written on the Reading bank for $110,000, followed local bank. by a check for $500,000 two days later. The Reading Over the next several days, bank officials began account did not have sufficient funds to cover ei- noticing that Hutton deposited checks worth mil- ther check. The Genesee Bank decided to freeze the lions of dollars. Without waiting for credit from the Hutton account and returned checks for $2,071,000 Federal Reserve, the bank had also paid $8,000,000 and $8,000,000, notifying the local Hutton office of on checks that had been written by Hutton on the their action. account. Amazingly, the amounts that Hutton were During a visit to the local Hutton office, three depositing and withdrawing added up to more than Genesee officials told Hutton to take their business

267 268 E. F. Hutton elsewhere. The bank subsequently returned three banks for all money lost, plus interest. Convinced checks totaling $7,000,000. that his company had done nothing wrong, Foman Following company procedures, Genesee offi- paid former Attorney General Griffin Bell cials notified the auditor of their parent company $3,000,000 in fees and expenses to investigate the about the problems with the Hutton account. Offi- activities of his employees. The move backfired, cials there reported Hutton’s activities to the and the House of Representatives opened hearings deputy supervisor of New York banks and sent on the Hutton fiasco. copies to the Federal Reserve and the Federal De- On November 8, 1986, Robert P. Rittereiser posit Insurance Corporation. New York State inves- succeeded in forcing Foman to step down and took tigators discovered that Hutton’s paper trail led to over as Hutton’s chief executive officer. After tak- Manufacturers Hanover Trust (Manny Hanny) and ing charge of E. F. Hutton, Rittereiser set a massive Chemical Bank at which Hutton’s main accounts reorganization plan in place. He divided Hutton were lodged. By auditing four days of Hutton activ- into two parts: one to handle retail brokerage serv- ities at the two banks, state regulators found the ices and the other to oversee institutional and capi- same pattern of inexplicable transfers of funds be- tal markets. Unfortunately for Hutton, on October tween Hutton offices and the two banks. For in- 19, 1987, the stock market plummeted 508 points in stance, audits of the Manny Hanny accounts a single day. As a hypothetical exercise, Cable News uncovered an overnight overdraft of $1.3 billion on Network (CNN) explored the influence of an insol- the Hutton account. Both banks were astounded to vent brokerage house on investors. learn that Hutton had been using overdrafts as E. F. Hutton was described as a “weak link in short-term, no-interest loans that cheated the banks the financial chain,” and Hutton executives recog- out of millions of dollars in interest. To do this, nized that reclassification from its A-2 commercial Hutton had used a check-kiting scheme, which was rating to A-3, the lowest possible rating, was immi- variously known as “chaining” or “floating“ to nent. Stock shares in the company dropped $11, amass huge profits at the expense of banks that han- and it was rumored that E. F. Hutton was in danger dled their accounts. of going under and that Foman had committed sui- Federal investigators pursued Hutton tirelessly, cide. Standard and Poor’s let it be known that Hut- deciding to use Hutton to bring an end to the prac- ton’s credit rating was under close scrutiny. In an tice of overdrafting by big corporations. Finally, effort to recoup, the company had spent employee prosecutors concluded that the evidence gathered retirement funds with no ability to replace the from Hutton’s activities at the Northern Central funds’ capital. Bank in Williamsport, Pennsylvania, where Hutton The best course of action seemed to be to sell had been overdrawing its account for $900,000 a E. F. Hutton. Foman liked the idea of revenge on day during most of 1981, provided evidence that Rittereiser and was also attracted to the prospect of was clear enough for a jury to understand Hutton’s a $3,000,000 investment-banking fee for his role in “illegal, fraudulent, and criminal” actions. Surpris- the sale. After 83 years of providing successful ad- ingly, no individuals within E. F. Hutton had been vice, Hutton was up for grabs. The front leaders in targeted by investigators. the bidding war were Merrill Lynch, Dean Witter, Letters dated April 20, 1984, were sent to E. F. and Shearson Lehman. After Shearson’s bid of Hutton Group, E. F. Hutton and Company, and var- $960 million, $29.25 per share, was accepted on Jan- ious Hutton officials informing them of the Depart- uary 29, 1988, 1,450 Hutton employees were dis- ment of Justice’s intent to prosecute E. F. Hutton. missed, and armed security guards searched them as Lawyers predictably advised Hutton officials to they left the building. Over the next month, an ad- claim the Fifth Amendment. In February, federal ditional 3,350 Hutton workers received pink slips. prosecutors found their “smoking gun” in a memo Ironically, Hutton had rejected a Shearson offer of dated April 1982 written by one Hutton official to $50 a share in 1987. After the buyout, no one was another describing the check-kiting scheme in de- listening to E. F. Hutton; it no longer existed. tail. In 1985, E. F. Hutton pleaded guilty to 2,000 SEE ALSO counts of mail and wire fraud and was required to check kiting; investment fraud; bank fraud; accounting pay a $200,000,000 fine in addition to repaying fraud. Eastern Europe 269

BIBLIOGRAPHY: Donna S. Carpenter and John Feloni, goods and foreign currency. In all the EE nations, The Fall of the House of Hutton (Henry Holt, 1989); John there was misappropriation and outright theft of Lorinc, “The Anatomy of Failure,” Canadian Business state property and speculation in scarce goods. (August 1990); Larry Reibstein, “Crimes and Misde- Criminal networks, including officials from state in- meanors,” Newsweek (November 19, 1999); James Stern- stitutions, gradually consolidated through the late gold, Burning Down the House: How Greed, Deceit, and 1970s and 1980s. Beginning as small-scale suppliers Bitter Revenge Destroyed E. F. Hutton (Simon and Schuster, of clothing, household articles, and building mate- 1990); Mark Stevens, Sudden Death: The Rise and Fall of rials, some groups branched out into the bootleg- E. F. Hutton (New American Library, 1989. ging of alcohol and drug trafficking. After the fall of the Berlin Wall in 1989 and the ELIZABETH PURDY, PH.D. rapid disintegration of the bureaucratic command INDEPENDENT SCHOLAR economies, the openings for organized crime multi- plied. Socioeconomic marginalization increased dramatically, providing a fresh recruiting ground for criminal organization as well as a sharp reduction in Eastern Europe the population’s trust in legal private enterprise and government structures. Liberalization and privatiza- THE RISE OF white-collar and organized crime in tion programs were corruptly managed, giving the Eastern European (EE) nations closely parallels white-collar criminals in organized crime new eco- that of their powerful neighbor, Russia. Eastern Eu- nomic activities to exploit. rope generally refers to the states formerly under As Michel Chossudovsky writes, the privatiza- the control of, or heavily influenced by the Soviet tion programs in all the EE nations “favored the Union: Albania, Bulgaria, Czech Republic (Czecho- transfer of a significant portion of state property to slovakia), Hungary, Poland, Romania, and former organized crime.” As traditional state economic Yugoslavia. structures were weakened, so too was law enforce- Once the state socialist economies collapsed in ment. Gradually, according to Ben Fowkes, organ- the late 1980s and early 1990s, massive economic ized crime brought “a culture of bribery, theft and crisis and sociopolitical dislocation created a power even violence from the underground economy into vacuum which has been largely filled by organized the world of legal private enterprise.” criminal elements. The economic crisis spawned by The emphasis by governments on property civil war and international military intervention in rights and market freedom occurred at the expense the Balkans also opened up opportunities for local of public accountability, sociopolitical equality, and mafias. As in Russia, neo-liberal policies, socioeco- economic security. While there has been economic nomic disparity and weak legal and democratic recovery in some countries, the lion’s share of the structures have fostered the integration of “legiti- wealth has been concentrated in the hands of a tiny mate” and “illegitimate” business. While the extent minority of politicians and business people, most of the economic crisis in most of the EE nations of whom have connections with organized crime. has not been as severe as in Russia, all countries have registered a growing influence by organized BULGARIA crime in diverse economic sectors, and much of this crime is transnational with groups from various In Bulgaria, the privatization process offered wind- countries, especially Russia, intimately involved in fall opportunities for ex-politicians such as Andrei numerous countries of the European continent. Lukanov, twice former premier of the government The bureaucratic command economies of the and leading member of the post-communist party. EE regimes were highly centralized: production and Lukanov and his associates took up key positions in distribution of goods were organized by state-con- the newly privatized banks and industries and even- trolled companies. As in Russia, increasing integra- tually formed a powerful financial-industrial con- tion with the world market and growing problems glomerate, Multigroup. in effectively coordinating the highly bureaucratic The directors of many of the companies in this economy led, by the 1970s, to the development of a group allegedly had access to communist party thriving black market, especially for consumer funds through banks accounts in Switzerland and 270 Eastern Europe

Members of the House of Parliament in Budapest, Hungary, have been unable to stem the rise of white-collar crime, as privatization of the Hungarian state companies has delivered quick and handsome profits.

Austria. It was suspected of pilfering state assets Continued expansion of the private sector led through hidden privatization schemes and other il- to growing concentrations of private capital which legal practices. For instance, Multigroup’s Intersteel became targets for organized crime. According to used Lukanov’s connections with newly privatized the former chief of the Investigation Department of Russian gas companies to make huge profits from the National Police in Hungary, these gangs would managing the old state steel company, which is one plant spies in high society to target potential victims of the largest consumers of Russian gas in the coun- and use separate gangs to execute burglaries. Still try. Lukanov was assassinated in 1996 allegedly by another group would be responsible for fencing or rival organized crime interests. The illegal growth of selling the stolen goods. Simultaneously, the semi- Multigroup was replicated by diverse groups in all privatization process of certain areas of the econ- economic sectors so that by 2000, over half of Bul- omy such as catering, tourist, and entertainment garia’s private companies were controlled by mafia allowed these gangs to launder their money and in- interests. vest in “legitimate” businesses. After the communist state collapsed, Hungarian HUNGARY mafias expanded their operations. By 1994, 30 per- cent of the gross domestic product was produced In Hungary, liberalizing measures were first intro- through the expansion of the black market econ- duced in the 1970s: there was a steady increase in omy of the pre-Soviet days. With rising unemploy- travel between EE countries and the gradual devel- ment, skyrocketing inflation and a drastic decline in opment of small-scale private industry and cross- economic output, crime gangs moved into all areas border retail. In this way, the country became a of the economy to provide goods and services un- transit corridor for Yugoslavian and Albanian arms available in the legitimate economy. Privatization of smugglers and the location of stolen goods net- the state companies also promised quick and hand- works operated by Polish syndicates. Local criminal some profits. The state oil monopoly was abolished elements made common cause with these foreign in the 1990s before legal regulations were enacted to groups, which soon included gangs from the Soviet govern the new private market. Organized crime republics, facilitating the growth and extension of quickly took advantage of this legal vacuum, creat- criminal networks in and through Hungary. ing oil companies and using old state facilities at no Eastern Europe 271 cost to dominate the market. A two-tier pricing sys- imposed on Serbia in 1992, land and water routes tem designed to shield ordinary citizens from price were strictly controlled within Yugoslavia, allowing gouging also resulted in new black market opportu- the emergence of widespread black market net- nities for the local mafia. works of fuel, food, and other goods which circum- The extraordinarily lucrative profits to be vented the embargo through cross-border trade gained from the oil business alone has led to fierce from Bulgaria and Romania. It is also apparent that competition and mounting violence, including nu- much of the billions in aid to countries such as merous gangland-style executions. Since 1991, there Bosnia—either in the form of money, food, or med- have been more than 100 bombings and grenade ex- icine—has been stolen by local mafias in alliance plosions in Hungary as rival elements fight it out for with corrupt politicians. influence and wealth. POLAND BALKAN PENINSULA In Poland, the story is similar. The more than 400 The countries of the Balkan peninsula have also organized criminal factions are involved in every- seen a dramatic increase in organized and white-col- thing from drug trafficking and prostitution to pro- lar crime. The civil wars of the 1990s and continued tection rackets and smuggling. The U.S. State political instability in the former Yugoslavia have Department claimed in 2001 that Poland had be- fostered the development of conventional organ- come a major center for the production of syn- ized criminal activities such as consumer goods thetic drugs such as Ecstasy and amphetamines, as smuggling, drug trafficking, prostitution and auto well as a trans-shipment point for suppliers of nar- theft. Albanian gangs have used their connections cotics in Turkey and the Ukraine. Drug addiction with growers in Afghanistan and an increasingly so- and drug-related crime have soared in the last phisticated use of the internet to corner the heroin decade. The drug business is apparently controlled market in much of Europe. When sanctions were by three major syndicates operating out of Gdansk

Gray smoke rises above the rooftops of Warsaw, Poland, symbolizing the rise of industrial capitalism and its side effects of pollution, and growing organized and white-collar crime. 272 Eastern Europe and Warsaw. The Pruszkow mafia is one of the carriers, boats, and planes. In 1999, a Czech com- largest of such groups. It engages in car and art pany was discovered trying to sell six fighter jets to theft, money laundering, extortion, prostitution North Korea. Weapons trading is officially legal in and drug trafficking. It has been involved in a the country, but government spokespeople admit bloody turf battle with the Wolomin group for con- that they have little control over the companies or trol of these lucrative economic activities. the thousands of transactions that occur each year. As in Russia and other Eastern European coun- tries, the importing and exporting of women for ALBANIA sexual exploitation is flourishing in Poland. Police estimate that 15,000 young women from Bulgaria, The Albanian economy enjoyed an economic boom Romania, and the former Soviet republics are in the early 2000s. Yet, observers such as the re- brought into Poland for prostitution each year. Re- spected non-governmental organization, Interna- cent reports suggest that criminal groupings from tional Crisis Group (ICG), note that just under half other EE nations and the former Soviet republics of the gross national product results from organ- have made attempts to take over this trade, resulting ized crime. As in the other EE countries and Russia, in public gun battles and numerous murders. the distinction between corporate crime and organ- ized crime is blurry, especially since organized crime CZECH REPUBLIC (CZECHOSLOVAKIA) runs, or heavily influences corporate behavior, whether legal or not. As Kreshnik Spahiu, a lawyer In Czechoslovakia (split as the Czech Republic and involved in anti-drug trafficking cases, laments, Slovakia in 1993), organized criminal gangs were “The reality is that Albania is built with black first founded by immigrants from the large Viet- money.” In the early 1990s, the first phase of the namese community. By 2003, there were 10-15 such post-communist transitional economy was financed organizations involved in smuggling goods such as through pyramid schemes which collapsed in 1997, cigarettes and people from Central Asia and South- bringing with them widespread chaos. According to east Asia to Western Europe, including sex trade the ICG, a wide layer of politicians, government bu- workers. Vietnamese gangs engage in money laun- reaucrats, police and respectable businesses are all dering, drugs, and extortion and invest in legitimate implicated in organized crime. business such as restaurants and casinos. In recent years, authorities report that native Czechs are now ROMANIA working for these criminal elements who inextrica- bly merge traditional organized crime with legiti- Romania does not grab as many of the headlines as mate business. the other European countries, yet its population of By the mid-1990s, the Czech Republic also re- 22 million makes it one of the biggest countries in ceived an influx of organized criminal gangs from Eastern Europe. It shares all the major features of Russia, the Ukraine, and Chechnya. Beginning with organized crime in the neighboring nations: close illegal immigration schemes for Russian and ties to politicians and respectable firms, shady deal- Ukrainian workers, these international groups ex- ings with formerly state-owned property, and in- panded into drug trafficking and prostitution. volvement in smuggling, prostitution, and extortion Transnational gangs such as these have introduced schemes. the highly profitable trade of arms smuggling into The early 1990s saw a massive banking fraud Czechoslovakia in the early 2000s. Arms smugglers perpetrated by former state officials which led to use the country to sell to rogue regimes seeking the loss of the life savings of tens of thousands of clandestine deals that will not be noticed by interna- small-scale investors. Romania’s current economic tional authorities. In 2002, two Czechs and a Cana- woes stem from massive under-development during dian were arrested for allegedly selling small arms to the communist era. Once again, mafia elements Iraq. have moved in to take advantage of a poorly func- During home searches, catalogues of Russian- tioning system of consumer goods production and made weapons were found which were being offered distribution. The country’s proximity to Russia has to customers in Arab countries. In addition to also facilitated the growth of drug trafficking, illegal firearms, the catalogues also offered tanks, missile immigrant smuggling, automobile theft, and, per- economic espionage 273 haps most seriously, a black market in nuclear mate- or proprietary intellectual property including for- rial from the former Soviet republics. Romania’s or- mulas, patents, budget and marketing plans, cus- ganized crime comprises tightly knit crime families tomer lists, new technology developments, pricing with close connections to politicians, like-minded information, or any other type of information that mafias in the other EE countries, and legal private has some potential economic value. These secrets enterprises. typically account for roughly 70 percent of a com- While there have been attempts by lawmakers pany’s market value, making them a highly valuable and the police, often in alliance with international asset and a prime target of many competitors. agencies and governments, to combat organized The premium placed on such information rep- crime in Eastern Europe, most observers report resents a fundamental shift from an economy based that it is a losing battle. Some nongovernmental or- on tangible goods to a system based on intellectual ganizations, trade unions, and other groups in civil property. Illegally obtaining access to a trade secret society have begun to courageously publicize and gives foreign competitors several advantages. It gives organize against corruption, but these initiatives foreign entities the opportunity to introduce the have so far only made a minor impact. product or service before anyone else, and thus real- ize a larger profit. In addition, the stealing of trade SEE ALSO secrets allows an entity to under-price the original corruption; Russia; human trafficking; drug trafficking; owner or developers since less money is needed for organized crime. research and development. Finally, economic espi- onage allows a company to modify and/or improve BIBLIOGRAPHY. J. F. Brown, The Grooves of Change: upon the stolen trade secrets. Eastern Europe at the Turn of the Millennium (Durham Several companies consider economic espi- University Press, 2002); Michel Chossudovsky, The Glob- onage a more cost efficient means of spending re- alization of Poverty (Zed Books, 1997); Ben Fowkes, The sources. Rather than spend the time and money to Post-Communist Era: Change and Continuity in Eastern Eu- conduct actual research and development, compa- rope (Macmillan, 1999); Geza Katona, “Crime and Cor- nies can spend a fraction of the cost to steal infor- ruption After Communism,” East European mation. Constitutional Review (v.6/7, 1997); Roman Kupchinsky, In one of the largest economic espionage cases “The Eastern European Drug Racket,” “Czech Arms to date, Avery Dennison spent roughly $200 million Smuggling Ring Caught,” “Organized Crime in the on research and development over a four-year span Czech Republic,” Organized Crime and Terrorism to develop adhesive formulas and tapes. One of its Watch, www.rferl.org/corruptionwatch (2003); Richard foreign competitors Four Pillars, a Taiwan-based Lotspeich, “Crime in the Transition Economies,” Europe- company, paid an Avery Dennison employee, Vic- Asia Studies (v.47/4, 1995); Andrzej E. Marek, “Orga- tor Lee, only $160,000 over eight years to steal pro- nized Crime in Poland,” Organized Crime: A Global prietary information concerning the development Perspective (Rowan & Littlefield, 1986); Louise Shelley, of adhesive formulas. In all, Lee stole approxi- “Transnational Organized Crime: The New Authoritari- mately 12,000 research and development docu- anism,” The Illicit Global Economy and State Power ments including 71 adhesive formulas and 37 trade (Rowan & Littlefield, 1999). secrets concerning specialized adhesive tapes. SEAN PURDY, PH.D. Estimates indicate that economic espionage QUEEN’S UNIVERSITY costs U.S. companies tens of billions of dollars each year in lost trade secrets and other proprietary information. According to the American Society for Industrial Security (ASIS) and federal govern- economic espionage ment estimates, U.S. businesses lost approximately $1.2 trillion during the 1980s to economic espi- ACCORDING TO THE Federal Bureau of Investi- onage. More recently, a 1999 ASIS survey indicated gation (FBI), economic espionage refers to the steal- that 97 of the top 1000 Fortune companies lost over ing of trade secrets or confidential information by $45 billion in stolen trade secrets. Approximately foreign governments or companies against U.S. half (44) of the companies had more than 1,000 in- businesses. Trade secrets are any secretive, private, cidents of theft totaling nearly $1 billion. The aver- 274 economic espionage age estimated loss was approximately $500,000 per Citibank. The group hacked into the company’s incident. computers and transferred money into banks in According to the survey, most acts of economic seven different countries. Computers have allowed espionage occurred in high technology and service companies to store more information in a single lo- industries, while the manufacturing industry tended cation, but at the same time this information has be- to lose the most money, averaging a loss of almost come more accessible and easier to steal. Through $50 million dollars per incident. Small and the use of a computer, a single individual can copy, medium-sized businesses generally suffered the download, and transfer confidential information most significant losses. Many of these companies within minutes to other parts of the world. In addi- were unable to recover from the loss of trade secrets tion, computers provide a great deal of anonymity which are extremely vital for survival. making it difficult to apprehend offenders. Lastly, the use of computers to engage in economic espi- NATIONAL SECURITY onage makes investigation and detection a fairly complex and difficult task. In many ways, comput- The tremendous scope and huge financial losses at- ers have inadvertently become a tool in the realm tributed to economic espionage led former FBI Di- of economic espionage. rector Louis Freeh to assert that foreign countries stealing and spying on U.S. companies represents ECONOMIC ESPIONAGE ACT the most serious threat to the nation’s security since the Cold War era (aside from terrorism). In this re- In order to address the growing concerns of U.S. spect, economic espionage has been viewed as a companies and their vulnerability to economic espi- threat to the long-term survival of many U.S. com- onage, Congress enacted the Economic Espionage panies. Act (EEA) of 1996 to effectively criminalize the Traditionally the term espionage was associated stealing of trade secrets. Under the EEA, trade se- with military spying and the stealing of military in- crets are broadly defined to include “all forms and formation or secrets. With the end of the Cold types of financial, business, scientific, technical, War, a new form of espionage emerged that concen- economic, or engineering information, including trated more on the spying and stealing of confiden- patterns, plans, compilations, program devices, for- tial economic and intellectual properties. At the mulas, designs, prototypes, methods, techniques, same time, the United States emerged as a dominant processes, procedures, programs, or codes, whether economic power. Subsequently, America became tangible or intangible, and whether or how stored, one of the leading nations in developing valuable in- compiled, or memorialized physically, electroni- tellectual property and contributing new services cally, graphically, photographically, or in writing.” and products to the world market. As a result, for- The EEA also stipulates that the owners must take eign companies and governments began to establish “reasonable measures” to keep confidential infor- spy networks to target and obtain U.S. companies’ mation a secret. If owners fail to safeguard propri- trade secrets in order to remain competitive. During etary information, no one can be rightfully accused the 1990s, FBI information revealed that at least 23 of stealing it. Finally, the act requires that the trade countries had engaged in acts of economic espi- secrets must have some form of actual or potential onage against U.S. companies. economic value. Another FBI finding indicated that at least 100 The EEA is a combination of sections 1831 foreign governments and/or businesses were spend- through 1839 of the U.S. Codes. The Foreign Trade ing resources to target and acquire U.S. technology. Secret Theft or section 1831 of the EEA specifically Over half of these companies were using covert op- addresses the issue of economic or foreign espi- erations. The most frequently targeted industries in- onage. In many respects, problems and concerns clude aerospace, computer hardware and software, with foreign invasions were the single most impor- defense technology, and biotechnology. Because of tant reason why the EEA was passed. Under section the increased development and reliance on comput- 1831, criminal penalties will occur when an accused ers, most companies have become especially vulner- steals without authorization a trade secret that will able to hacking. In 1994, a group of hackers from knowingly or purposefully benefit any foreign gov- St. Petersburg, Russia, stole over $10 million from ernment and agency. Edelhertz, Herbert 275

This includes the stealing by any foreign govern- letin (November, 2000); American Society for Industrial ment or agent or anyone acting on their behalf. Security/PricewaterhousCoopers, Trends in Proprietary Criminal penalties for violating this section of the Information Loss: Survey Report, www.pwcglobal.com EEA include a fine of up to $500,000 or imprison- (1999); Andrew Grosso, “The Economic Espionage Act: ment up to 15 years, or both for an individual and Touring the Minefields,” Communication of the ACM for an organization, a fine of up to $10 million. (August, v.43). Also under the EEA, a court can force a person to forfeit to the United States any property or pro- JASON DAVIS ceeds obtained directly or indirectly from a viola- UNIVERSITY OF SOUTH FLORIDA tion of the EEA.

PROSECUTION Edelhertz, Herbert (1922–1999) Prosecutions under the EEA have been relatively rare. As of 2003, only 37 cases have been success- HERBERT EDELHERTZ WAS a criminologist and fully prosecuted under the act. One of the primary scientist who specialized in the study of white-collar problems is the reluctance of companies to file crime and organized-crime business activities. He criminal charges. Most companies fear the risk of authored several books and reports on the business publicly disclosing valuable trade secret informa- of organized crime, corporate fraud, and the prose- tion through court documents. In an espionage case cution of white-collar crime. Edelhertz defined involving Bristol-Meyers Squibb and their secret white-collar crime as any “illegal act or series of il- formulas for the cancer-fighting drug, Taxol, federal legal acts committed by non-physical means and by judges ruled that prosecutors had to release the con- concealment or guile, to obtain money or property, fidential documents to the defendants’ lawyers in to avoid the payment or loss of money or property, order to protect due process rights. The defendants’ or to obtain business or personal advantages.” This were Yuen Foong Paper Co., a Taiwanese company explanation, though it attempts to improve upon that had two employees. Edwin H. Sutherland’s original working definition They approached an FBI agent, posing as a Bris- of white-collar crime, has been criticized for its tol-Meyers technology information broker, and al- overbroad approach that leaves room for the inclu- legedly offered him $200,000 plus a percentage of sion of non-occupational crimes. their sales for access to Taxol technology. Bristol- Edelhertz, however, claimed that Sutherland’s Meyers appealed the ruling in an effort to protect definition (“a crime committed by a person of re- the secrets from those accused of attempting to spectability and high social status in the course of steal them. In this way, the EEA presents problems his occupation”) was too restrictive. He believed for both victims and the accused. Many companies that white-collar crimes encompassed non-business have turned to private consulting or intelligence activities such as filing false personal income tax re- agencies to help prevent future incidents of eco- turns, claiming fraudulent social security benefits, nomic espionage. and concealing assets in a personal bankruptcy. In his essay for the book White Collar Crime: An SEE ALSO Agenda for Research, Edelhertz stressed the impor- industrial espionage; corruption; bribery; computer tance of distinguishing between “the different hacking. forms of behavior that fall under the rubric of white-collar crime, since they may vary so widely in BIBLIOGRAPHY. Steven Fink, Sticky Fingers (Dearborn, terms of motivation, characteristics or modus 2002); Chris Carr and Larry Gorman, “The Revictimiza- operandi, victims, impact, and amenability to reme- tion of Companies by the Stock Market Who Report dies.” He also recommended better data availability Trade Secret Theft Under the Economic Espionage Act,” on the incidence and impact of white-collar crime. Business Lawyer (November, 2001); John L. Fialka, War by Edelhertz described how solving the problem of Other Means (Norton, 1997); Peter Schweizer, Friendly white-collar crime must include a focus on the is- Spies (Atlantic Monthly Press, 1993); Thomas S. Stutler, sues of equity and sentencing. The disparity be- “Stealing Secrets Solved,” The FBI Law Enforcement Bul- tween the infrequency with which criminal charges 276 Eisenhower, Dwight D. are brought against white-collar offenders and the Dwight Eisenhower who had led the Allied forces regularity with which “crimes of the poor and dis- to victory in World War II, and who had served as advantaged” are prosecuted is a shortcoming of cor- commander of NATO forces from 1948 to 1951. porate crime policy. When Edelhertz published his Eisenhower was not a partisan by any means. Before report, The Nature, Impact and Prosecution of White- 1952, he had never voted in a single election. One of Collar Crime, the National Institute of Law Enforce- Eisenhower’s most lasting legacies was the appoint- ment and Criminal Justice felt that white-collar ment of Earl Warren (1891–1974) as chief justice of crimes were receiving scant attention from the law the Supreme Court in 1953. enforcement agencies and research communities. The Warren Court became one of the most lib- As the economic and social environment of a re- eral courts in the history of the United States, gion changes, Edelhertz wrote, we become more handing down major decisions that changed the fab- vulnerable to white-collar crime. Although street ric of life in America. For instance, Brown v. Board crimes, burglaries, and drug violations seem more of Education 347 U.S. 483 (1954) began the move to- pressing, Edelhertz asserted that “to ignore white- ward desegregation of public schools; Gideon v. collar crime is to undercut the integrity of our soci- Wainwright 372 U.S. 335 (1963) required states to ety.” provide lawyers for individuals who could not af- Edelhertz was in the private practice of law be- ford them; and Griswold v. Connecticut 381 U.S. 479 fore becoming a staff scientist in the Science and (1965) articulated the implied right of privacy that Government Center of the Battelle Human Affairs led to the landmark abortion decision Roe v. Wade Research Centers in Seattle, Washington He also di- 412 U.S. 962 (1973). Eisenhower later said that nam- rected nationwide federal prosecutions of white- ing Warren to the Court was the worst decision he collar criminal activities as chief of the Fraud made as president. Section, Criminal Division, U.S. Department of Justice. MILITARY-INDUSTRIAL COMPLEX

SEE ALSO Perhaps Eisenhower’s greatest legacy in the field of Sutherland, Edwin H.; differential association; Cressey, white-collar crime was his unprecedented acknowl- Donald; organized crime. edgement and warning to the American public about the collusion of industry and government. BIBLIOGRAPHY. Herbert Edelhertz, A National Strat- In his farewell speech in 1961 prior to departing egy for Containing White-Collar Crime (The Free Press, from office, Eisenhower outlined his concerns: 1980); Herbert Edelhertz and Thomas D. Overcast, eds., White-Collar Crime: An Agenda for Research (Heath and ... This conjunction of an immense military es- Company, 1982); Herbert Edelhertz and Thomas D. tablishment and a large arms industry is new in Overcast, Organized Crime Business Activities and their Im- the American experience. The total influence, plications for Law Enforcement, 1986–87 (Northwest Pol- economic, political, even spiritual, is felt in icy Studies Center, 1990); Herbert Edelhertz, The Nature, every city, every State house, every office of the Impact and Prosecution of White-Collar Crime (U.S. Gov- Federal government. We recognize the impera- ernment Printing Office, 1970). tive need for this development. Yet we must not fail to comprehend its grave implications. Our ROBIN O’SULLIVAN toil, resources and livelihood are all involved; so UNIVERSITY OF SOUTHERN MAINE is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted in- fluence, whether sought or unsought, by the mil- Eisenhower, Dwight D. itary industrial complex. The potential for the disastrous rise of misplaced power exists and (1890–1969) will persist. We must never let the weight of this combi- IN THE 1952 presidential election, both the Demo- nation endanger our liberties or democratic cratic and Republican parties courted General processes. We should take nothing for granted. Eli Lilly 277

Only an alert and knowledgeable citizenry can (DES), a synthetic estrogen widely used to prevent compel the proper meshing of the huge indus- miscarriages; Oraflex, an anti-inflammatory; Prozac, trial and military machinery of defense with our the popular antidepressant; and thimerosal, a pre- peaceful methods and goals, so that security and servative used in vaccines. Of the drugs that Lilly liberty may prosper together. The prospect of may have marketed without proper research or dis- domination of the nation's scholars by Federal closure, DES has caused the most pervasive and employment, project allocations, and the power best documented harms. The Centers for Disease of money is ever present and is gravely to be Control and Prevention (CDC) estimate that 5 to 10 regarded. million people are at risk from side effects from DES, many of them children or grandchildren of Eisenhower’s warning could not have been women who were prescribed the drug. more prescient. In subsequent decades, the revolv- First synthesized in 1938 by Edward Charles ing door of professionals working for government Dodds, DES was embraced by researchers as a less agencies and then being hired by the very same con- expensive, more potent substitute for natural estro- tractors whom they previously supervised, and vice gen, potentially able to cure a variety of female re- versa, has grown exponentially. Government con- productive ailments. Colleagues recall Dodds tract fraud, government procurement fraud, consulting for Lilly in the 1930s, says investigative bribery, and collusion have become major white- journalist Robert Meyers, but Lilly attorneys deny collar crimes and can threaten the integrity of pres- the researcher was ever on the payroll. Since Dodds idential administrations as well as companies. refused to seek a patent, Lilly was only one of over In 2003, Eisenhower’s concept of the collusion 250 companies that would make or market the between government and business was illustrated drug. once more as Vice President Dick Cheney’s former Dr. Don Carlos Hines recalled later, in testi- company, Halliburton, scooped up numerous re- mony prepared for Lilly’s defense, that in Decem- construction contracts in post-war Iraq. Public ber 1940 he joined with representatives from three scrutiny questioned just how much an influence other major pharmaceutical companies to pool Halliburton had in President George W. Bush’s de- their research in support of Food and Drug Admin- cision to invade Iraq. istration (FDA) approval for DES. Hines also in- sisted that results from animal testing, which SEE ALSO showed that DES caused cancer and reproductive military industrial complex; Bush, George W.; govern- abnormalities, could not be generalized to humans. ment contract fraud; government procurement fraud; In 1979, a New York jury disagreed, awarding bribery; corruption; revolving door. Joyce Bichler, whose mother had been prescribed DES while pregnant, $500,000 in civil damages. The BIBLIOGRAPHY. Public Papers of the Presidents, Dwight jury found that Lilly had coordinated with other D. Eisenhower, 1960 (U.S. Government Printing Office, drug manufacturers to avoid doing proper testing, 1999); Dean Albertson, ed., Eisenhower As President (Hill and that a prudent manufacturer would never have and Wang, 1963); James David Barber, The Presidential brought the product to market if testing had been Character (Prentice Hall, 1992). done. Bichler was one of a number of women, all ex- ELIZABETH PURDY, PH.D. posed in the womb to DES, who in their teens or INDEPENDENT SCHOLAR early 20s developed a rare form of vaginal cancer, clear-cell adenocarcinoma. A pattern of this dis- ease, formerly seen only in post-menopausal women, was noticed in the late 1960s by Dr. Eli Lilly Howard Ulfelder of Massachusetts General Hospi- tal. Researchers later found that “DES daughters” SINCE THE 1970s, this pharmaceutical manufac- also face higher risks for reproductive tract abnor- turer has been hit with hundreds of lawsuits argu- malities, ectopic pregnancies, and infertility. Prob- ing that the company failed to disclose risks lems found in “DES sons” include genital associated with four substances: diethylstilbestrol abnormalities and a higher rate of noncancerous 278 Eli Lilly cysts on the testicles. Women who took DES may eral Claims. Though faced with lawsuits from par- face higher breast cancer risks. ents who claim that thimerosal in routine vaccina- Meyers notes that Lilly’s salespeople were ac- tions caused their children’s autism, Lilly denied tively promoting DES to doctors and pharmacists lobbying for the measure. Retiring Senator Dick even before it was approved by the FDA. Among Armey (R-TX) claimed credit, but many pundits the research omitted from later DES promotional dismissed this as a publicity move. Considerable de- brochures was a study, conducted from 1950 to bate surrounds medical studies on potential links 1952 at the Chicago Lying-In Hospital, that found between vaccines and autism. DES not only failed to prevent miscarriages but With the exception of vaccines, all of the com- seemed to cause them. Lilly did not fund its own re- pany’s product liability issues have centered on flag- search on DES effects until after the FDA banned ship products. Lilly claimed from 50 percent to 70 the drug in 1971. percent of the market for DES and held patents on The company did fund research on anti-arthri- Oraflex and Prozac. The latest marketing success to tis drug Oraflex, approved by the FDA in 1982. face legal challenges is Zyprexa, a schizophrenia However, they did not disclose to the FDA that the drug that accounted for one-third of Lilly’s sales in drug could cause liver or kidney damage in elderly 2002. Five suits accuse Lilly of suppressing evi- patients, despite reported fatalities in the United dence that Zyprexa can trigger diabetes. Kingdom and Denmark. Available for just three On the other hand, Lilly’s corporate record is months in the United States, Oraflex is believed to not all suspect; the company has developed numer- have caused 26 deaths and 200 cases of non-fatal ous initiatives, including, for example, producing organ failure. In August 1985, Lilly pled guilty to 25 new and safer forms of insulin and spending mil- misdemeanor counts of withholding information lions per year on diabetes education. and mislabeling, paying $1,000 per count. The sole civil judgment against Lilly was secretly settled dur- SEE ALSO ing the appeals process. Food and Drug Administration; pharmaceutical indus- Secret settlements were also critical to Lilly’s try; unsafe drugs; research fraud. ability to fend off lawsuits related to the popular anti-depressant Prozac, explains an investigative re- BIBLIOGRAPHY. Joyce Bichler, DES Daughter: The Joyce port by the company’s hometown newspaper, the Bichler Story (Avon, 1981); Centers for Disease Control Indianapolis Star. As well as quietly settling more and Prevention, DES Update, www.cdc.gov/des (2003); than 200 suits alleging that Prozac caused violent or Marlene Cimons, “Eli Lilly Pleads Guilty of Failure to suicidal behavior, Lilly offered to pay the legal costs Disclose Oraflex-Linked Deaths,” Los Angeles Times (Au- of doctors sued for prescribing the drug. “This is a gust 22, 1985); Stephen Fenichell and Lawrence S. Char- public relations controversy, not a medical contro- foos, Daughters at Risk: A Personal DES History versy,” Lilly spokesman Edward West told the Wall (Doubleday, 1981); H.R. 5005, Homeland Security Act Street Journal. The active ingredient, fluoxetine hy- of 2002, www.dhs.gov/dhspublic (2003); Eli Lilly & drochloride, is no longer under patent. Lilly contin- Company, Delivering Innovation: Annual Report 2002; ues to market Prozac despite a 73 percent drop in Amy Dockser Marcus and Wade Lambert, “Eli Lilly to U.S. sales of fluoxetine products in 2002; the drop Pay Costs of Doctors Sued After They Prescribe is attributed to generic competitors. Prozac,” Wall Street Journal (June 6, 1991); Eliot Marshall, Strangest of Lilly’s product liability dramas is “Guilty Plea Puts Oraflex Case to Rest,” Science (Septem- how protection from lawsuits related to thimerosal, ber 3, 1985); Robert Meyers, DES: The Bitter Pill (Seav- a mercury-based vaccine preservative not used in iew/Putnam, 1982); Jeff Swiatek, “Lilly Confronts the United States after 1999, found its way into the Zyprexa Claims,” Indianapolis Star (April 16, 2003); Jeff Homeland Security Act of 2002. Title 17 amends Swiatek, “Lilly’s Legal Strategy Disarmed Legions of the Public Health Service Act to set a three-year Prozac Lawyers,” Indianapolis Star (April 22, 2000); time statute of limitations on civil suits for harms Jonathon Weisman, “A Homeland Security Whodunit,” from any labeled component of a vaccine, not just The Washington Post (November 28, 2002). the active ingredients. Most cases would instead go to a special vac- WENDE VYBORNEY FELLER, PH.D. cines court administered by the U.S. Court of Fed- ST. MARY’S COLLEGE OF CALIFORNIA elite crime 279

which the company’s stock fell from $80 a share to elite crime $0.30. Enron investors collectively lost about $60 billion, which included many large pension plans ELITE CRIME includes acts committed by mem- and the retirement savings of up to 20,000 Enron bers of the upper classes, including these who head employees. corporate and governmental organizations. The Enron turned out not be an isolated incident phrase perhaps best fits Edwin H. Sutherland’s def- and the list of companies touched by financial scan- inition of white-collar cite as “a crime committed dal soon included Tyco, Global Crossing, Quest, by a person of respectability and high social status WorldCom, Xerox, Adelphia, MicroStrategy, Im- in the course of his occupation.” Clone, and homemaker Martha Stewart, AOL- Though the cases have been made that white- Time Warner, K-Mart, and some major banks, such collar crime encompasses more than just occupa- as Citigroup and J.P. Morgan Chase. tional malfeasance committed by persons of “high In terms of violence committed by the elite, en- social status,” (note, for example, crimes committed vironmental pollution, unsafe working conditions, by low-level employees), crimes committed by elite and unsafe products have all produced scores of members of society may have the most damaging deaths and injuries. Thousand of workers die each effect. Elite crimes may be committed for personal year due to the acts of their employers, but rarely is gain and/or for fostering the power, profitability, or their criminal liability. The felony is an exception. influence of the organization. In September 1991, a fire destroyed a chicken-pro- White-collar crime is massively harmful finan- cessing plant in Hamlet, North Carolina. When the cially, but also includes violence and reduction of 100 employees in the plant tried to escape, they civil liberties. 2002’s big crime story was a long and found that the company executives had ordered the complicated saga of corporate financial shenani- doors locked “to keep out insects and to keep em- gans that caused a significant drop in stock market ployees from going outside for coffee breaks, or prices. Although the economic losses were wide- stealing chickens.” Twenty-five workers died in the spread, Fortune magazine notes: “The not-so-secret fire; some were found burned to death at the doors dirty secret of the crash is that even as investors they couldn’t open. Another 50 were injured. were losing 70 percent, 90 percent, even in some The owners of the company and two plant man- cases all of their holdings, top officials of many of agers were charged with involuntary manslaughter. the companies that have crashed the hardest were The outcome: The owner pleaded guilty and was getting immensely, extraordinarily, obscenely sentenced to 10 years and 6 months in prison. Some wealthy.” people may not think this is a severe enough pun- At center stage was Enron Corporation, a ishment for someone responsible for 25 very multibillion-dollar energy-rights trading company, painful deaths, but note three revealing facts. First, which declared one of the largest bankruptcies in the sentence was “believed to be the hardest judg- history on December 2, 2001, with debts of over ment over handed out for a workplace safety viola- $31 billion. Enron was subsequently accused of tions.” Second, as part of the plea agreement, the having perpetrated a massive “disinformation” involuntary manslaughter cases against the two campaign, hiding the degree of its indebtedness plant managers were dismissed, though they surely from investors by treating loans as revenue, and hid- knew that he doors were locked and what the risks ing company losses by creating new firms with com- were. And third, the owner eventually served a little pany capital, and then attributing losses to them more than four years in prison and was released. rather than Enron. As Enron shares were taking a Such a person sentenced is an exception to the rule. dive, Chief Executive Officer Ken Lay was e-mailing Elite crime is not prevalent only in the corpo- concerned employees, advising them to hold their rate world: During the 1960s and 1970s federal shares and buy new ones. agencies, including the executive branch, Central In- Meanwhile, Lay cashed in $103 million of his telligence Agency, and Federal Bureau of Investiga- own shares in the company. Enron executives un- tion (FBI) illegally tapped phones, and violated loaded nearly a billion dollars worth of stock while many civil liberties of those involved in the civil employees were locked out of selling the holdings rights movement and anti-Vietnam war movement. in their pensions during much of the period in Perhaps the most elitist position in the world, the 280 elite crime

The concept of elite crime: The man above is convicted of ... is convicted of stealing a $2,500 car from his employer. $250 million in stock fraud, while the man at right ... Which man will serve significant, hard time in prison?

U.S. presidency, is not immune, either. Former Pres- SEE ALSO ident Richard M. Nixon resigned due to the white- corruption; bribery; prosecution; Sutherland, Edwin H.; collar, elite crimes he committed during his Nixon, Richard M.; Watergate. presidency, including Watergate. J. Edgar Hoover, head of the FBI, was a major player in promoting BIBLIOGRAPHY. David R. Simon, Elite Deviance (Pear- and overseeing such illegal activities against the civil son, 2002); David O. Friedrichs, Trusted Criminals: White rights movement and anti-war movement. Collar Crime In Contemporary Society (Thomson, 2004); Elite criminals usually are not arrested, and if Jeffrey Feiman, The Rich Get Richer and the Poor Get Prison convicted get much more lenient sentences than (Allyn & Bacon, 2004); Nancy Frank, Crimes Against working- and lower-class criminals. On July 11, Health and Safety (Willow Tree Press, 1985); Stuart L. 2002, at a hearing of the Crime and Drugs Subcom- Hills, Corporate Violence (Rowman & Littlefield, 1988); mittee for the Senate Judiciary Committee on the Mary Clifford, Environmental Crime (Cameron May, subject of “Penalties for White-Collar Crimes: Are 1998). We Really Getting Tough on Crime,” Senator Joseph Biden, Jr. (D-D) said: CHARLES E. REASONS, LL.B. PH.D. CENTRAL WASHINGTON UNIVERSITY Under federal law, if … you steal a car out of my driveway and you drive it across the state line into Pennsylvania, ten years. Ten years, federal guideline. You take a pension by violating embezzlement ERISA, the federal system to safeguard pen- sions, misdemeanor, and maximum one year. EMBEZZLEMENT IS A wide-ranging offense that The pension may be worth $1,800,000. My car involves the misappropriation or destruction of may be worth $2,000. money or property with which a person has been entrusted. Virtually any property, including animals The simple fact is that many people believe the and trade secrets, can be embezzled. Its etymologi- American criminal justice system reserves its harsh- cal origin has been traced to the French embeiseller, est penalties for its lower-class clients and puts on which means to destroy or to make away with. The kid gloves when confronted with a better class of offense runs a gamut from willful failure to return a crook. rented DVD movie to a multimillion dollar theft by embezzlement 281 an employee of a large corporation. Under most guardian, agent, or employee. Persons charged with circumstances, embezzlement should be one of the embezzlement need not hold such a relationship, simplest crimes to commit because there are very and persons charged with criminal conversion may few easier ways to obtain money without working indeed meet the requirements of a fiduciary. for it than retaining someone else’s property, which To complicate matters further, embezzlement is is already in one’s possession or control. usually differentiated from fraud according to the The crime we now know as embezzlement orig- exact moment at which the intent to steal (mens rea) inated in England as a common law offense in 1473 was present. If the intent existed prior to posses- based on the Carrier’s Case, which involved the sion of the property stolen, then the offense consti- theft of bales of wool by an agent while transport- tutes fraud rather than embezzlement. This is also ing them to the coast. This was the first time that an known as “bad faith” embezzlement because before agent who stole goods placed in his care could be the thief takes possession of the goods there is in- criminally prosecuted. Prior to the Carrier’s Case, tent to steal them. “Good faith” embezzlement, on no “trespass” or usurpation of the goods (the essen- the other hand, is true embezzlement, and involves tial element of larceny at the time) could be shown taking possession of the goods without having in a theft-after-trust because the goods were consid- criminal intent to steal them, but such intent mate- ered to be in the legal possession of the thief. rializes sometime after possession of the goods has Carrier’s Case may be seen as an example of occurred. “structural Marxism”—when laws are enacted in Many persons have been convicted of embez- order to promote the viability of a capitalistic eco- zlement even though they formed the intent to steal nomic system. If the precedent in Carrier’s Case before gaining possession of whatever was pecu- had not been created at the time that it was, the es- lated. Larceny is a lesser offense compared to em- tablishment of English and other European trade bezzlement, but necessarily included in it. Stealing routes of the 15th and 16th centuries would have from another’s cash drawer to which one has legiti- been severely retarded; there would be no recourse mate access is embezzlement, but this scenario is for theft-after-trust by transportation agents. Car- often punished as larceny. Embezzlers, then, are rier’s Case was absolutely necessary to promote the often incorrectly charged with offenses instead of growth of those economies. embezzlement or criminal conversion. The first statute outlawing embezzlement was not enacted until 1529. Embezzlement statutes orig- WHITE-COLLAR EMBEZZLEMENT inally specified trust theft from specific victims (the military, banks, post office, a servant’s employer), Edwin H. Sutherland referred to embezzlement as and then evolved into the modern general defini- an example of white-collar crime when he first tion of wrongful conversion of entrusted property. coined the phrase in 1939. White-collar crime for Sutherland referred to crimes committed in the PROBLEMS IN APPLYING LABELS course of occupation by persons with high social status. He continued to equate embezzlement and Embezzlement is a crime of specific intent in which white-collar crime in virtually all of his later publi- a person purposely misappropriates, misapplies, or cations on the subject. destroys something that has been legally entrusted However, embezzlement is committed in many to that person but which she does not own, thereby circumstances which do not meet the criteria for a usurping the legal owner’s control. Embezzlement white-collar crime, either in terms of the offender’s is essentially interchangeable with the crime of high social status or the criminal opportunity aris- criminal conversion because both are defined in ing in the course of occupation. In the first major terms of theft-after-trust. Criminal conversion is research work on embezzlement—Other People’s often an essential element of embezzlement, and Money (1953) by Donald Cressey—it was found some jurisdictions have only conversion statutes by that, as a group, the trust violators in the study which to punish embezzlers. If any difference exists could not be considered white-collar criminals be- between embezzlement and criminal conversion, it cause they lacked the requirement of high social is that in embezzlement the thief usually holds a fi- prestige. Similarly, Dorothy Zeitz, who studied fe- duciary relationship to the victim, such as trustee, male embezzlers, did not find that the women could 282 embezzlement be characterized as having high social status. It is sig- cause they are relatively powerless compared to nificant that neither of these two major research their victims. Relatively little embezzlement, then, studies on embezzlement referred to their trust vio- is white-collar crime according to the original con- lators as white-collar criminals. Technically, then, ceptualization of the term because it has nothing to using Sutherland’s original conception, embezzle- do with Sutherland’s three criteria (criminal organi- ment can only be considered a white-collar crime zation, high social status, occupational opportu- when persons commit a theft-after-trust while they nity). Anyone with entrusted property or ideas of are, in Sutherland’s terms, wearing “good clothes at any kind can commit embezzlement. work.” Although they represent a very small propor- Perhaps the most telling difficulty in pinpoint- tion of all embezzlements, there are some instances ing the relationship between embezzlement and where Sutherland’s three conditions for white-col- white-collar crime is revealed in Sutherland’s belief lar crime have been met. As an example, Henry that white-collar crime is fundamentally organized Pontell and Kitty Calavita describe collusive frauds crime. He believed this because legal definitions of involving savings and loan financial institutions white-collar crimes often necessitate an organized during the 1980s that led to “collective embezzle- conspiracy or collusion—such as in price-fixing, ment.” These offenses were very organized and al- bid-rigging, commercial bribery, industrial espi- ways collusive, involving an inside officer or onage, and physician fee-splitting. Further, he be- employee who violated trust by knowingly approv- lieved that persons working on behalf of large ing illegal loans, deriving financial benefit. Whereas corporations were formally organized both in their typical corporate crime involves the use of the orga- attempts to control legislation governing their busi- nization’s resources to commit crimes against con- ness behavior and efforts to influence the selection sumers and other organizations, Pontell and of regulatory administrators who enforce laws Calavita point out that collective embezzlers use the against them. organization to commit crimes for their benefit. Sutherland also discussed “informal” organiza- tion of white-collar criminals, referring to business AGGREGATED EMBEZZLEMENT DATA moralities that run counter to the law. Entire indus- tries or professions—or major segments of them— The primary source on the extent and characteris- are often characterized by beliefs that favor the tics of embezzlers in the United States is the Uni- violation of legal norms, thereby tacitly encourag- form Crime Reports (UCR), compiled annually by ing the commission of white-collar crime. Some the Federal Bureau of Investigation from data sub- white-collar criminals who violate the law are not mitted by state and local police departments. The chastised by their counterparts and peers because UCR does not record embezzlement offenses. How- so many engage in the same or similar illegalities— ever, embezzlement is classified as a Type II, or thus, they are “informally” organized around legal “non-index,” category in the UCR, which means it violations. is reported only in terms of the number of persons The vast majority of embezzlements, on the arrested for embezzlement, and their basic demo- contrary, are unlike other “organized” white-collar graphics (race, sex, and age). The annual number of offenses because they lack criminal organization. arrestees for embezzlement is far less than the num- First, the legal definition of embezzlement does not bers for most other offenses. require collusion. Second, occupational embezzlers The UCR definition of embezzlers includes as a group are not formally organized to avoid crim- those involved in any “misappropriation or misap- inal labels for the behavior. plication of money or property entrusted to one’s Third, embezzlement lacks “informal” organiza- care, custody, or control.” As such, the UCR cate- tion, for it can hardly be said that the crime is pro- gory contains embezzlers and criminal converters, moted by widespread business beliefs that regardless of their social prestige or whether their encourage it. If anything, embezzlement is most as- crimes occurred in the course of their legitimate sociated not with organized offenders but with or- employment. It would also include trust violators ganized white-collar victims. without regard to whether the offender first took To illustrate, Sutherland referred to embezzlers possession of the stolen property in good faith. Be- as the most foolish of all white-collar criminals be- cause this category for embezzlers includes all types embezzlement 283 of trust violators, it is inappropriate for scholars to instances in which Cressey’s motive of the non- represent it as indicating any involvement in white- sharable financial problem was not a universal pre- collar crime, whether in numbers of arrestees or in condition to the offense. For men, a taste for a more terms of involvement by race, sex, and age. affluent lifestyle—that is, greed—also proved to be a major motivator to embezzlement. For women, EXPLANATIONS OF EMBEZZLEMENT stealing was seen as a way of meeting the basic needs of their families or of retaining or regaining The platitudinous (and sexist) “cause” of embezzle- the affectations of a mate. Each of these motives ment has been variously termed “wine, women, and was perceived by the actor to be a financial need, wagering,” “bookies, babes, and booze,” and “slow but they were not necessarily pressing monetary horses and fast women.” These are, of course, mo- problems. tives for stealing rather than explanations for it. Thirty years after his original research, Cressey Cressey has noted that when people tell you “why” concluded that although the non-sharable financial they embezzled—that is, their motives—they do not problem was not critical, the neutralization of the explain why they embezzled. In searching for a fresh criminal nature of the behavior was his most salient approach through the use of “analytic induction,” finding. However, many of the embezzlers in oth- Cressey revamped hypotheses until he reached a ers’ research freely admitted that they knew that four-step process that he believed explained the embezzlement was wrong before they committed it crimes of all 133 federal embezzlers he studied in and they did not feel any need to neutralize. Women his classic work Other People’s Money: 1) there exists embezzlers have stated that there was no need to an nonsharable financial problem, a problem that neutralize because they were simply fulfilling expec- the offender is ashamed or afraid to share with oth- tations ingrained since childhood that mandated ers and for which legitimate sources of money are they take care of their families and mates. unavailable; 2) embezzlement is seen as a means for Two other theories, differential association and solving the problem; 3) the offender possesses the self-control, deserve mention because, unlike technical knowledge to carry out the theft; and 4) Cressey’s attempt to explain embezzlement specifi- the criminal behavior is neutralized to be acceptable cally, these theories purport to describe factors or to reflect general nonresponsibility of the of- characteristic of criminality generally. Sutherland’s fender. For example, the money was “borrowed” differential association, briefly stated, hypothesizes rather than stolen, the victim mistreated the of- that crime is a function of learned moralities from fender and deserved to be victimized, the money be- significant others. The extent to which persons longed to the offender anyway, or the offender had learn values that favor a criminal act over those that personal issues. disfavor it will dictate whether they commit a crime. There are at least two problems with Cressey’s Differential association also states that techniques methodology. First, it is based upon incarcerated for committing crimes are learned from other crim- offenders who are several stages removed from the inals. offense itself—not all embezzlers are discovered, ar- In Other People’s Money, Cressey initially set out rested, charged, convicted, or given a disposition of to ascertain whether differential association ex- imprisonment, and attrition will occur at each of plained embezzlement. The effort was understand- these stages. His group, then, cannot be claimed to able because Sutherland was Cressey’s dissertation be representative of good faith occupational embez- mentor for Other People’s Money and insisted that zlers. Second, after arriving at his analytically in- differential association was the most plausible ex- duced four-step process—rather than using the planation for all white-collar crime. more straightforward method of strict hypothesis Cressey abandoned differential association early testing—Cressey may well have forced his interpre- in his study as a root cause of embezzlement be- tations to fit his theme. cause his research contradicted two main ideas of Cressey has essentially agreed with this latter differential association: that embezzlers should be criticism when he stated in Other People’s Money directly socialized into criminal behavior by other that there is no positive answer to the question of thieves and that they should learn the techniques whether he neglected or unwittingly distorted nega- for committing it from other embezzlers. Many of tive cases. Later researchers have come across many Cressey’s embezzlers did, however, learn neutraliza- 284 employee crimes tions favorable to the violation of law from non- include this hodge-podge of violators, those significant others when, through contact with co- sources are inappropriate for the study of white-col- workers, they came to believe that some business lar crime. Regardless of the motivation to embez- crimes were merely technical violations rather than zle—be it a financial problem, greed, gambling morally wrong. debts, or simply the elevation of one’s lifestyle—the Michael Gottfredson and Travis Hirschi’s self- need is perceived to be real enough to prompt in- control theory would support an explanation of volvement in the offense. embezzlement if people who commit it also commit Neutralization of the wrongfulness of embez- a lot of other lower self-control behaviors. An im- zlement is often a precursor to participation in the portant corollary to the theory is that people who offense, but one need not learn excuses from oth- lack self-control are likely to be versatile in their im- ers, or learn the techniques to commit the offense mediate gratification behaviors, both criminal and from others. Persons charged with embezzlement noncriminal. That is, they will be more involved in are very likely to be involved in a wide variety of theft, violence, accidents, unsafe sex, gambling, other criminal behaviors. drug and alcohol abuse, lying, poor work perform- ance, cheating in college, and any other behaviors SEE ALSO that do not defer immediate gratification. Put sim- Sutherland, Edwin H.; differential association; Cressey, ply, if self-control theory is correct, then embez- Donald; self-control theory. zlers must engage in criminal and other deviant behaviors more frequently than those who do not BIBLIOGRAPHY. Donald Cressey, Other People’s Money embezzle. (Free Press, 1953); Gerald Mars, “Dock Pilferage: A Case Self-control theory would point, at least anec- Study in Occupational Theft,” Deviance and Social Con- dotally, to the “wine, women, and wagering” prob- trol (Tavistock, 1974); Dorothy Zeitz, Women Who Embez- lems, debt-ridden finances, and other lower zle or Defraud: A Study of Convicted Felons (Praeger, 1981); self-control behaviors (and neutralizations) that are Gwynn Nettler, “Embezzlement Without Problems,” so well associated with embezzlers. More systematic British Journal of Criminology (v.14, 1974); Gary Green, empirical evidence, however, is found in one study “White-Collar Crime and the Study of Embezzlement,” of the official arrest records of embezzlers—two- Annals of the American Academy of Political and Social thirds had at least one other arrest. Of them, four- Science (v.525, 1993); Jerome Hall, Theft, Law, and Society fifths had an additional arrest for a theft crime, a (Bobbs-Merrill, 1952); Kitty Calavita and Henry Pontell, third had an additional arrest for a crime of vio- “Savings and Loan Fraud as Organized Crime: Toward a lence, and a third had a drunken driving arrest. The Conceptual Typology of Corporate Illegality,” Criminol- average number of arrests for the group was six and ogy (v.31, 1993). the median was four. GARY S. GREEN CONCLUSION CHRISTOPHER NEWPORT UNIVERSITY

Embezzlement involves the criminal violation of trust and is a common law offense that can be traced back to the late 15th century. It can be seen as employee crimes a heterogeneous offense category because it in- cludes acts that are chargeable under numerous IN THE FIELD OF CRIMINOLOGY, the term em- criminal statutes, including embezzlement, criminal ployee crime, commonly referred to as occupa- conversion, fraud, and larceny. Because trust viola- tional crime, is generally agreed to be a subtype of tors commit theft both occupationally and other- white-collar crime. Beginning with the coining of wise, and because they represent persons of varying the term white-collar crime by Edwin H. Suther- social prestige, the offense category is not in line land, the broader concept of white-collar crime has with the original meaning of white-collar crime. Ex- been subject to numerous definitional revisions. cept in a few isolated cases, embezzlement also lacks For example, it is well known that Sutherland’s criminal organization, which is another criterion for definition of the term was “a crime committed by a white-collar crime. Because centralized data sources person of high status and respectability, in the employee crimes 285 course of his occupation.” This definition immedi- ples of kickbacks may vary considerably based on ately calls attention to the fact that the white-collar the particular industry involved, but could include offender is by nature, legitimately employed. Al- such common categories as money, gifts, or per- though it focuses on the characteristics of the indi- sonal favors. vidual offender, Sutherland’s most extensive study Fraud is also a general type of employee crime, of white-collar crime actually focused on sanctions and can take numerous forms. The Association of against entire organizations, rather than separate in- Certified Fraud Examiners (ACFE), a leading au- dividuals. thority on the topic, has conducted extensive re- As a result, the distinction between corporate search on what they have termed occupational and occupational crime emerged: corporate crime fraud. This offense is broken down further into was considered to be a crime that is committed on three categories: asset misappropriation, corrup- behalf of the employing organization, while occu- tion, and fraudulent statements. Each of these cate- pational or employee crime was considered to be gories contains yet additional subcategories based committed against the employing organization, to on the strategies used to commit them and on the the benefit of the individual. Some debate about resulting gains (financial or non-financial) for the in- this distinction has emerged in the field, mainly in dividual offender. the concern over what types of occupations should For example, asset misappropriation, the most be studied. This issue is related to Sutherland’s orig- common type of occupational fraud, generally con- inal concern with the status of high-class, re- sists of one of two forms: cash or other assets. Ac- spectable individuals, particularly with regard to the cording to research conducted by the ACFE, cash is fact that their characteristics often render them im- the asset most often targeted by employees. Misap- mune from legal action. propriation of cash may occur at all levels of an or- In spite of ongoing definitional disputes, the ganization. Corruption, similar to kickbacks, distinction between the two forms of white-collar involves collaboration between an inside employee crime has generally been accepted. Researchers and one or more outsiders in an attempt to defraud studying employee crime may focus on specific oc- the employer in some way that benefits the individ- cupations, or choose to include a wider variety of ual offender. Fraudulent statements, which typically offenses that may occur equally often in different occur at higher levels of organizations, also tend to occupational settings. Broader conceptualizations take one of two forms: the falsification of an orga- of employee crime tend to incorporate a large num- nization’s financial statements (for example, over- ber of acts that share the characteristic of violating statement of revenue) or, alternatively, falsification trust: the individual employee violates his or her of other documents or records (for example, infor- employer’s trust by engaging in acts that directly or mation in the employee’s human resource file). All indirectly victimize the place of business. of these forms of occupational fraud are violations of trust, and all victimize the employer. TYPES OF CRIME RELATED CRIMES The Integrity Center, an organization that conducts risk-management assessments for employers, has Related types of occupational crime include embez- identified several offenses that are consistent with zlement, pilferage, and theft of services. The com- employee crime. One such offense that may occur mon conceptualization of embezzlement is the in a variety of settings is espionage, which is defined taking of money or property by an employee who as: the theft or unauthorized acquisition of secret has been entrusted with its care, custody, or control, or restricted information. The purpose of indus- which is consistent with the ACFE’s description of trial espionage is usually related to the acquisition asset misappropriation. In the field of criminology, of unique and profitable information belonging to a one of the most detailed studies of this type of em- commercial enterprise. Another common form of ployee crime was conducted by Donald Cressey, employee crime is referred to as kickbacks. Kick- published in his popular 1953 book, Other People’s backs are various payments or favors that are given Money. clandestinely to decision-makers in return for se- In this study, Cressey conducted extensive inter- lecting the offender’s products or services. Exam- views of convicted embezzlers serving time in fed- 286 employee crimes eral prison, and found that these former employees time the costs due to this offense can amount to had many similarities. All of the offenders were considerable losses for the employer. A similar em- trusted by their employers with money or property. ployee crime is referred to as theft of services. This Many of them also identified the fact that they were particular offense consists of the unauthorized use experiencing a “non-shareable financial problem” at of, or failure to pay for, various services obtained the time of the embezzlement, such as debt due to through the employer. Common examples may in- gambling, blackmail, or womanizing. Many of the clude making long-distance phone calls or personal offenders also provided common rationalizations photocopying at the expense of the employer. for their embezzlement, such as the idea that they Other types of employee crimes may be were simply borrowing the money from their em- grouped together based on the fact that they involve ployer with the intent of eventually repaying it. As a similar type of employee: an individual who is a result of this and similar rationalizations, embez- bored, feels overworked, has an unresolved dispute zlers did not think of themselves as criminals. with the employer, or is attempting to gain an unfair Unlike embezzlement, the employee crime of competitive advantage over her co-workers. Four pilferage generally does not involve the taking of such employee crimes discussed by the Integrity money, but instead refers to smaller scale thefts of Center are sabotage, robbery, burglary, and larceny, relatively inexpensive materials. For example, it may all of which have a legal counterpart definition. include tools, various office supplies, or other items The broad definition of sabotage consists of a owned by the employer. Although pilferage is typi- variety of actions, such as the deliberate destruction cally viewed as a low-level employee crime, over of property, that are intended to impede the em- ployer’s operations in some way. Comparatively, the employee crime of robbery is distinct in that it tends to involve actual force or the threat of force against a victim. Employees may rob their fellow employees, outsiders, or could even give informa- tion to outsiders who may use it to rob employees or the organization. Burglary, a related employee crime, entails an employee entering a building or ve- hicle in an unauthorized manner, and either stealing something tangible or committing another serious crime while inside. Like robbery, burglary can be di- rectly committed by an individual employee, or could also involve a situation whereby the employee provides information to an outsider, who then will physically commit the offense. Larceny is generally defined as stealing some- thing from a place where an individual has a legiti- mate right to be present. In the common definition, larceny may consist of a customer shoplifting from a business. Alternatively, and perhaps even more dangerous to employers, is theft by employees themselves. This type of employee crime is also re- ferred to as “shrink” because it involves missing or unaccounted-for inventory. Like all previously de- scribed employee crimes, larceny victimizes the em- ployer and can result in large losses, financial and otherwise, over time. Finally, a newer type of employee crime is any offense that is related to technology, particularly Asset misappropriation, or stealing from the till, is one form computers. Crimes committed with the use of a of occupational or employee crime. computer may be related to or occur in combina- employee crimes 287 tion with any of the previous forms of employee tect the behavior in subsequent criminal back- crime. Other employee crimes specifically involving ground checks. the use of a computer include altering data as it is To prevent crimes by existing employees, busi- entered into a computer, removing data from a sys- nesses have a number of potentially useful options. tem, or releasing confidential data to unauthorized In the past decade, technological advances have third parties. made the prevention and detection of employee crimes easier to accomplish. One readily available FIGHTING EMPLOYEE CRIME technique is the installation and use of closed-cir- cuit television monitors. Cameras can be installed at What can businesses do to protect themselves from a variety of locations: randomly, throughout a busi- being victims of employee crime? Several strategies ness, or even directed specifically at a location have been proposed. Employers may be well served where cash transactions take place, such as above a by defending themselves at the pre-employment cash register or customer service counter. This type stage. They can take a variety of steps in the hiring of preventative technique is common in retail set- process. For example, one option is to conduct a tings, and also serves to detect crimes committed criminal background check on potential employees. against the business by the general public (such as Such checks are relatively simple to perform, and shoplifting). This option involves close monitoring may be conducted by the organization itself or by a trained security team, and immediate action through consultation with a reliable outside agency. when a crime is detected. The enactment and publi- A criminal background check may determine cation of strict security policies, such as an auto- whether a potential employee has any previous ar- matic report to local police and/or a 100-percent rests or convictions for crimes that may be related prosecution policy may go a long way in deterring to the workplace. For instance, a previous theft con- the potential employee criminal from acting. viction may suggest that a potential employee is not One of the problems with employee crimes is an appropriate candidate for a position that in- that may of them are not so easily detected through volves the handling of money. Employers can use procedures like cameras that may regularly catch information from criminal background checks to common shoplifters. For example, corruption and develop general or specific hiring policies. They fraudulent statements, two forms of occupational may decide to bar potential employees who have fraud, may often involve transactions that are not any prior criminal involvement (even offenses that obviously witnessed. Several options are still avail- do not appear to be related to the workplace), or able to detect such offenses. One potentially benefi- enact a more specific policy that prevents employ- cial strategy is the implementation of an ment of individuals with prior work-related of- anonymous reporting system so honest employees fenses. In conducting background investigations, can tip off the employer about the criminal activi- however, employers should proceed with caution ties of other employees. An anonymous reporting and not rely on a criminal check alone to make a system could consist of a 24-hour, toll-free hotline hiring decision. Recent research on this topic has that employees could call when they are away from suggested that some individuals may have extensive work, or it could also take the form of a suggestion histories of employee crimes, but this information box or random survey where no identifying infor- will only be detected in a criminal background mation is required. Regardless of the format, check if the individual’s prior employer took legal anonymous reporting systems can encourage em- action against the offender. ployees to report crimes without fear of retaliation All too often, employers may choose simply to by the offending employee. dismiss the offender due to fear of negative public- In addition to background checks and anony- ity or to avoid the expenses of a criminal trial. mous reporting, research by the ACFE has revealed When conducting background checks, employers that two other practices may be useful in the detec- should also carefully check prior references in an at- tion of employee crimes. These mechanisms are in- tempt to uncover any relevant information that may ternal audits and external audits. Both serve a go undetected by a criminal check. When employ- similar function, which is a thorough assessment ers choose to severely punish offending employees, and reconciliation of a businesses’ financial ac- they can also ensure that future businesses will de- counts, documents, or related information. While 288 employee safety both internal audits and external audits could ben- agency charged with the health and safety of work- efit the organization, the internal audit may be inef- places for employees in the United States. OSHA fective if it is related to the source of the crime was created in 1970 from the Occupational Safety itself. An external audit by a non-related, third Health Act (OSHA act). The act’s stated goal is to party, especially if it is conducted unannounced, ensure that every working person and woman in the may be more useful for the discovery of employee United States has safe and healthful working condi- crimes. tions. The law has given employees a wide range of In the balance of severity and harm caused by rights. One of these rights requires companies to re- white-collar crime, employee crimes rank, for the duce risks in the workplace, and if there are risks, most part, as almost innocuous compared to the then employees have the right to fight for their staggering cost in lives and money of corporate health and safety. crimes, those committed not necessarily by employ- During the 1980s, OSHA’s budget was drasti- ees, but more likely, employers. cally cut and this had a major impact on the ability of OSHA agents to conduct inspections. Inspec- SEE ALSO tions are the main tool used to make sure that com- embezzlement; kickbacks; employee theft. panies comply with safety standards that are set for each industry. In 2003, OSHA had 1,123 inspectors BIBLIOGRAPHY. W. Steve Albrecht, Fraud Examination who were charged with overseeing approximately 7 (Thompson-Southwestern, 2003); Report to the Nation on million worksites that employ over 111 million Occupational Fraud and Abuse (Association of Certified workers. OSHA had 1,388 inspectors in 1980. Fraud Examiners, 2002); Donald Cressey, Other People’s The United States has seen an increase in work- Money: A Study in the Social Psychology of Embezzlement sites and employees but a decrease in the number of (Free Press, 1953); Neal Shover and John Paul Wright, inspectors. Because OSHA is so strapped for in- Crimes of Privilege: Readings in White-Collar Crime spectors, it allows many of the states to take over (Oxford University Press, 2001); Joseph T. Wells, Occu- this responsibility. Section 18 of the Occupational pational Fraud and Abuse (Obsidian Publishing, 1997); Safety and Health Act of 1970 encourages states to The Integrity Center, www.integrityctr.com (2003). develop and operate their own job safety and health programs. OSHA approves and monitors state KRISTY HOLTFRETER, PH.D. plans. FLORIDA STATE UNIVERSITY The OSHA act provides for criminal sanctions in various situations. If an employer willfully vio- lates a standard, rule, order or regulation which causes the death of an employee she may be held employee safety criminally liable. If an employer makes a false repre- sentation regarding compliance with the OSHA act EVERYDAY millions of Americans go to work this too may make him criminally liable. Employers with the expectation that they will return home un- may be subject to civil and criminal fines and, in harmed. However, this is not the case for everyone. rare instances, imprisonment. A willful violation is In 2001, there were 5,900 worker-related deaths and a voluntary action that is done with either inten- 5.2 million injuries and illnesses according to the tional disregard of or with plain indifference to the Bureau of Labor Statistics. The rate for 2001 fatali- statutory requirements. Malicious intent is not re- ties, injuries, and illnesses was the lowest since the quired to impose liability. bureau began collecting this information in the early 1970s, but the rates, most scholars agree, are CASE HISTORIES still unacceptably high. Many of these cases are caused by egregious and willful safety violations. It Some historical cases of willful violations include is very rare for employers to be held criminally li- particular industries, like coal mining, asbestos, and able, let alone be imprisoned, for violation of state many textile factories. One of the first major coal and federal safety laws. mine disasters of the television age occurred in The Occupational Health and Safety Adminis- 1968 when 78 men were killed in an explosion in a tration (OSHA) is the main federal regulatory coal mine in Farmington, West Virginia. The igni- Enron Corporation 289 tion source that set off the original explosion never voluntary manslaughter and was sentenced to 20 could be determined. However, investigators did years in prison for his responsibility in the deaths of find a classic combination of factors, including in- 25 of his workers. adequate ventilation, inadequate control of explo- State and federal regulatory agencies like OSHA sive methane gas and coal dust, and inadequate can only do so much given the lack of budget and testing for methane, that could have set the stage for inspectors. It is the responsibility and legal duty of the explosion. an employer/company to create and maintain a safe The use of asbestos and its harmful effects have working environment for employees. also created unsafe working environments. Many of employees who had asbestosis, a type of lung can- SEE ALSO cer, have sued Johns-Manville, a major manufac- workplace violence; workplace deaths; Occupational turer of asbestos. Court documents confirm that Safety and Health Administration; Johns-Manville; Film Johns-Manville knew of the hazards associated with Recovery Systems, Inc. asbestos and intentionally kept the information from its employees. In fact, the asbestos industry BIBLIOGRAPHY. Bureau of Labor Statistics, had a long-standing policy of suppression. The in- www.bls.gov (2003); Scott Harshbarger, “Criminal Prose- dustry did not warn workers of the dangers of as- cution of Workplace Violence,” Trial (v.33/10, 1997); bestos exposure until 1964. Andrew B. Loewenstein, Adriana Rodriquez, and Erin Textile workers in North and South Carolina Stockley, “Employment-related Crimes,” The American have had high rates of byssinosis, an irreversible res- Criminal Law Review (v.36/3, 1999); Betty S. Murphy, piratory disease caused by the ingestion of textile Wayne E. Barlow, and Diane D. Hatch, “Employer Crim- fibers, like cotton dust. In 1980, an estimated inal Liability” Personnel Journal (v.72/2, 1993); Occupa- 35,000 workers were inflicted with this deadly dis- tional Health and Safety Administration, www.osha.gov ease. Working in a factory can be dangerous work, (2003); James R. Redeker and Deborah J. Tang, “Criminal but when one is not told of the dangers or is fired Accountability for Workplace Safety,” Management Re- for organizing protests of unsafe work conditions, view (v.77/4, 1988). then this may be criminal. Many executives in the textile industry spent decades denying the very exis- DEBRA E. ROSS, PH.D. tence of byssinosis. In some cases, the factories GRAND VALLEY STATE UNIVERSITY would hire company doctors who were told to tell employees that they were fine or simply had bron- chitis. Many of the employees had no understand- ing that their illnesses were caused by the industry’s Enron Corporation criminal negligence in not creating a safe working environment. ACCOUNTING FRAUD CAUSED the seventh- There have been several cases where owners and largest corporation in United States to fall victim to managers have been held criminally liable under white-collar crime. Its demise was due to accounting state law for willful violation of safety standards, practices in violation of Securities and Exchange but these are atypical. Two specific instances of suc- Commission (SEC) regulations. It is the classic case cessful criminal prosecution include the Film Re- of the devil is in the details. From its founding in covery Systems, Inc. and Imperial Food Products 1981 until the late 1990s, Enron was a dynamic, ex- cases. On June 14, 1985, Steven O’Neil, Charles panding energy corporation. The larger it grew, the Kirschbaum, and Daniel Rodriguez, agents of Film more it diversified. Recovery Systems, Inc. were convicted of murder The accounting fraud at Enron was complex, in the death of Stefan Golab, an employee, from but it is why it collapsed. Enron annual reports to cyanide poisoning. In 1990, on appeal, their case shareholders stated very high earnings but kept was reversed and remanded for a new trial. On Sep- nearly all its debt off the annual reports by stating tember 7, 1993, the three former employees entered in a footnote that a special purpose entity (SPE) guilty pleas of involuntary manslaughter. covered the debts. The use of special purpose enti- In September 1992, the owner of Imperial Food ties is a legitimate practice but there are federal reg- Products, Emmett Roe, age 65, pleaded guilty to in- ulations that were violated by Enron. A special 290 Environmental Protection Agency purpose entity guarantees a debt for a price, which New York Times reported. In his plea, Fastow admit- is its profit. First, though, it must have the assets to ted he had worked with other executive officers of cover the debt. Second, SEC regulations requires it Enron, including possibly Chief Executive Officer to be headed by a person not connected with a cor- Ken Lay, “to disguise Enron’s deteriorating financial poration which covers the debt. Third, investors in health, as well as engaging in a scheme to defraud the special purpose entity must have sufficient cap- Enron of millions of dollars for his own benefit.” ital at risk. None of these regulations were observed The business media reported prosecutors rec- for the SPEs created by Enron officials. ommended that Fastow serve a 10-year sentence, Enron’s chief financial officer, Michael Fastow, the maximum under the two counts to which he created special purpose entities incorporated under pleaded guilty. The former chief financial officer the names LJM 1 and LJM 2 (his wife’s and chil- faced an additional 96 counts, and settled related dren’s initials) among others directed by different civil charges with the SEC. Fastow agreed to surren- Enron officials. These SPEs were just post office der more than $23 million in civil and criminal boxes and bank account numbers in the Cayman Is- penalties. By July 2004, Lay was charged with 11 lands. Fastow was president of both SPEs while at felonies, including conspiracy, making misleading the same time an Enron executive in violation of statements, wire fraud, and bank fraud in a criminal SEC rules and Enron’s own internal code of ethics. indictment handed down by a grand jury. The SEC LJM 1 and LJM 2 had no capital at risk. Their entire also filed a civil complaint against him. assets were Enron’s own money backed up by its stock. Fastow transferred hundreds of millions of SEE ALSO dollars to LJM 1 and LJM 2 every year from 1997 to accounting fraud; offshore entities; Caribbean islands; 2001. It was deposited in LJM accounts and re- corporate liability; Securities and Exchange Commis- turned to Enron minus the fee for covering Enron’s sion. debt. The fee included Fastow’s salary as president of the SPEs and dividends for SPE shareholders. BIBLIOGRAPHY. “Ex-CFO of Enron Pleads Guilty,” The amount returned to Enron was then listed in The New York Times (January 14, 2004); Brian Cruver, the revenue column on the annual report and debt Anatomy of Greed: The Unshredded Truth from an Enron in a similar amount erased from the liability col- Insider (Carroll & Graf Publishers, 2002); Permanent umn. As a result, Enron’s annual report showed Subcommittee on Investigations of the Committee on very high income and virtually no debt, making it Governmental Affairs United States Senate, July 8, 2002: very attractive to investors. The Role of the Board of Directors in Enron’s Collapse The prudent decision would have been for (107th Congress, 2nd Session, Report 107-70); Mimi Enron to use its high income to pay its debts. How- Swartz and Sherron Watkins, Power Failure: The Inside ever, that would have left much less for shareholder Story of the Collapse of Enron (Doubleday, 2003). dividends and would cause stock prices to advance at a slow rate based on the actual profitability of the MICHAEL SIEGFRIED corporation. Fastow and other Enron executives COKER COLLEGE were major shareholders. Every year, 1997 to 2001, stock prices climbed and dividends were paid based on what appeared to be record financial perform- ance. Environmental Protection Agency In reality, the debts grew ever larger year to year until they reached $1.2 billion. At that point Enron BEFORE THE Environmental Protection Agency declared it must revise its financial statements. As (EPA) was created in 1970, earlier legislation had its stock value fell and the SPEs had no assets, bank- been enacted to protect the environment. However, ruptcy was the unavoidable consequence. these laws were weak, and poorly managed and en- On January 13, 2004, Fastow pleaded guilty to forced. two felonies, becoming “the highest ranking officer The first environmental law in the United at the company to admit to participating in crimes States was called the Rivers and Harbors Act of that contributed to Enron's collapse into bank- 1899 or the Refuse Act. This law was primarily de- ruptcy protection more than two years ago,” the signed to bar companies from discharging garbage Environmental Protection Agency 291 into navigable waterways. Clearly, this first law was the National Ambient Air Quality Standards. These aimed at protecting commerce not the environ- standards mandated two levels of protection for ment. However, two later Supreme Court decisions health and welfare and required the states to de- mandated that dumping industrial waste, whether velop similar implementation plans to protect the or not it interfered with commerce, was still a viola- air. In the early 2000s, many states still had not met tion of the law. the required standards set up by the EPA. In the 20th century, the first environmental law From 1972 through 1982 the U.S. States Con- was the Federal Insecticide, Fungicide and Rodenti- gress created or amended a variety of pieces of leg- cide Act passed in 1947 requiring companies to reg- islation designed to control and manage polluting ister pesticides used in interstate commerce. Public industries and sanction, fine, or punish those com- concerns about the environment arose in response panies that violated these regulatory laws. All of to the post-World War II burgeoning industrial de- these laws are administered or enforced by the EPA velopment and use of chemicals, as well as the nu- and include the following: clear fallout from the use of two atom bombs by 1. The Resource Conversation and Recovery the United States against the Japanese cities of Na- Act focuses on the control and management of gasaki and Hiroshima during World War II. This se- solid hazardous waste products. It is responsible for ries of new environmental legislation included the ensuring that such waste is properly generated, Water Quality Act of 1948 and its expansion in transported, treated, stored, and/or disposed of. Be- 1956 by the Federal Water Pollution Control Act. ginning in 1989 under this law, the EPA began pro- This act created the Federal Water Pollution Con- ducing the Biennial Reporting System (BRS) trol Administration that would approve new water- database that provides the identities of companies quality standards. producing waste as well as the volume of waste pro- duced by primary hazardous waste generators. POWERFUL ENVIRONMENTAL LAWS However, this list omits a number of facilities. 2. The Toxic Substances Control Act requires Also in 1955, the Air Pollution Control Act was pre-manufacture notification of any new chemicals passed. This was followed by the 1958 Food Addi- being developed. It requires testing of any chemi- tive Amendment or the Delaney Amendment re- cals that are not already regulated by the Food and quiring the Food and Drug Administration to ban Drug Administration (FDA). any food additives that were suspected of causing 3. The Comprehensive Environmental Re- cancer. However, it wasn’t until 1962, when a book, sponse, Compensation and Liability Act is aimed at Silent Spring, written by Rachel Carson was pub- repairing environmental harms (see below). lished, reflecting the public’s growing concern about 4. The Federal Insecticide, Fungicide and Ro- the effects of synthetic chemicals on all living denticide Act targets restrictions in the use of pesti- things. More powerful environmental laws and fi- cides. nally, the Environmental Protection Agency was 5. The Federal Water Pollution Control Act of created. 1972 was the first major law requiring a comprehen- In 1963, the Clean Air Act was passed and ini- sive approach to discharges of waste and led to the tially gave the secretary of Health, Education, and development of an extensive permit system. Welfare the power to define air quality based on sci- 6. The Clean Air Act of 1970 is designed to de- entific research. Then in 1969, after one of the fine air quality standards and required the EPA to Great Lakes (Lake Erie) was declared dead as the re- identify air pollutants and publish air quality stan- sult of industrial pollutants, and an oil spill off the dards through the National Ambient Air Quality California coast led to extensive damage to wildlife, Standards list. the demand for an Environmental Protection The Pollution Prevention Act of 1987 author- Agency was further empowered. In 1969, by execu- ized the collection of pollution data maintained in tive order, President Richard Nixon created the the Toxic Release Inventory (TRI). The TRI is avail- EPA, designed to enforce the new 1970 Clean Air able on the internet and lists the toxic chemicals Act. The EPA was initially charged with the respon- transferred or released by manufacturers with more sibility of identifying air pollutants hazardous to than 10 workers, producing over 25,000 pounds of humans and to publish air-quality criteria through or uses more than 10,000 pounds of one of the 350 292 Environmental Protection Agency identified toxic chemicals. The TRI includes air, dangerous, real threat but another type of site is re- land, water and underground releases. It is the re- ferred to as a Brownfield. A Brownfield site is de- sponsibility of the EPA, as the law enforcement fined by the EPA as an abandoned, idled, or agent of environmental laws, to ensure that all in- underused industrial or commercial facility where dustries comply with the requirements by negotiat- expansion or redevelopment is complicated by real ing compliance, and using the administrative or civil or perceived contamination. Such sites do not re- law to sanction or fine companies if they do not quire clean up as a superfund site does. What re- voluntarily comply with the law, as well as clean up mains problematic is that the average site remains any pollution that they have caused. on the superfund list for clean up for almost 11 As a last resort, uncooperative violators are re- years. ferred to the Department of Justice for criminal In response to this problem, Congress passed prosecution with penalties that can include fines the 1986 Superfund Amendments and Re-authori- and prison for responsible company executives. zation Act mandating that superfund sites end up The EPA is one of the largest of all the federal on the National Priority List for clean up within regulatory agencies. It has 10 regional offices that in- four years of the discovery, although this legislation clude environmental attorneys, investigators, and has not changed the time agenda. Ending up on the administrators. The EPA is a part of the executive National Priority List is the third step of an eight- branch of the federal government and is headed by step superfund investigative process conducted by an administrator, deputy, and nine assistant admin- the EPA, ending in a record of decision and the istrators nominated by the president. It should also plan for remedial action. be noted that the EPA also works with state envi- In addition to the Brownfield list, the Toxic Re- ronmental protection agencies in achieving enforce- lease Inventory and the superfund database exist to ment functions. Each state negotiates its particular record accidental chemical releases into the envi- degree of involvement in environmental protection ronment from fixed facilities. This is called the Ac- with the federal EPA. cidental Release Information Program Data and any Unfortunately, the EPA has no authority to in- release that may cause injury or death to humans or tervene in the event of hazardous waste or pollution damage to the soil, water, air, or wildlife must be emanating from chemical or nuclear weapons that recorded there. All information relevant to the loca- belong to the U.S. government. These issues remain tion, company, and amount of and type of toxins under the control of the Department of Defense. released are specified on the list. Moreover, the EPA cannot control U.S. transna- Growing scientific evidence reveals that many tional corporations who violate environmental laws polluting industries and superfund sites are near when they are operating overseas. predominantly poor or minority communities. While these blatant forms of classist and racist en- THE SUPERFUND PROGRAM vironmental crime remain permissible by law, some criminologists argue that such crimes are a violation In 1980, the Love Canal environmental disaster led of the equal protection clause of the 14th Amend- Congress to enact the 1980 Comprehensive Envi- ment. Further evidence of this racism exists in that ronmental Response, Compensation, and Liability minority superfund projects are on the National Act authorizing the EPA to create the superfund Priority List longer than other sites, and generally program to facilitate the clean up of hazardous take longer cleaning-up than other sites. waste sites. This act imposed taxes on crude oil and In a makeshift effort to address this issue, Presi- certain chemicals to provide the capital for the su- dent Bill Clinton signed an executive order requir- perfund. Unfortunately, as of 2004, it was no ing all federal agencies to make environmental longer authorized to gather taxes. However, the pre- equity a part of their mission. In 1992, the EPA cre- vious taxes continue to be received because of past ated an Office of Environmental Equity, now called due taxes and Treasury Department adjustments. the Office of Environmental Justice. This office has A superfund site is authorized when an indus- commissioned a task force to examine environmen- trial or individual pollution event occurs and cre- tal equity issues that oversees the National Environ- ates a significant danger to people, animals, and the mental Justice Advisory Council, a federal advisory environment. Superfund sites are considered very committee of citizens who offer guidance to the Equity Funding Scandal 293

EPA. Additionally, in 1993, the EPA made a series with a few thousand dollars, which by 1973 claimed of administrative changes, making the superfund assets of $1 billion making it the first white-collar program faster and more efficient. As of 2000, the crime to break the billion-dollar mark. The Equity active site remediation was completed at 43 percent scandal illustrated there is almost no limit to the of the National Priority List sites, and 12 percent of dollar amounts that can be fraudulently obtained sites were deleted from the monitoring program. and can go undetected for over a decade. However, toxic releases and emissions continue to Equity fabricated non-existing assets and sold grow and remain problematic across the United them. To understand how the scheme worked re- States as well as across the globe; many of these re- quires noting certain practices in the insurance in- leases and emissions contain materials that are car- dustry. Insurance companies buy and sell policies cinogenic. they issue to other companies, which is called rein- Internationally, protection of the environment surance. This spreads risk evenly over all companies is becoming a protected right of all peoples. The so, in the event of multiple claims, they do not fall right to a healthy environment exists in interna- too heavily on one insurer. For example, consider tional law in the Covenant on Economic, Social and that one company wrote all of the homeowner poli- Cultural Rights, which the United States has not cies in Florida and a hurricane caused billions of ratified. Also, the Rio Declaration is a binding inter- dollars in claims. It would endanger the company’s national treaty obliging all nations to recognize the financial stability to pay them all. But if many com- right to a healthy environment; only 34 out of 190 panies share the risk, each pays a portion of the nations have not signed this agreement. In addition, large number of claims. The same practice applies the Montreal Protocol on Substances that Deplete to life insurance. the Ozone Layer has been ratified by 112 nations. Knowing there is a ready market for life insur- ance policies among other insurance companies, the SEE ALSO founders of Equity Funding forged policies by writ- air pollution; water pollution; Clean Air Act; Clean ing insurance on nonexisting people or “fence Water Act; Justice, Department of; Love Canal. posts.” Secretaries made up fake names, ages, med- ical histories, addresses, and premiums on forged BIBLIOGRAPHY. Mark Atlas, “Few and Far Between? applications. When several thousand applications An Environmental Analysis of the Geographic Distribu- were forged, they were assigned policy numbers and tion of Hazardous Waste Generation,” Social Science entered into the company computer. These policies Quarterly (v.83/1, 2002); Robert D. Bullard, Dumping in were sold to other insurance companies in routine Dixie: Race, Class, and Environmental Quality (Westview reinsurance transactions for large sums of money. Press, 2000); Mary Clifford, Environmental Crime Enforce- The company buying the policies could expect to ment, Policy, and Social Responsibility (Aspen Publications, collect premiums on some policies for decades. 1998); Michael J. Lynch, J. Stretesky, B. Paul and Danielle Of course, in a month the first month’s premi- McGurrin, “Toxic Crimes and Environmental Justice: ums are due and will have to be forwarded to the Examining the Hidden Dangers of Hazardous Waste,” company that bought the policies from Equity. In Controversies in White-Collar Crime (Anderson Publish- the meantime, more fake policies were issued and ing, 2002); Jennifer Smith, et al., “From Superfund Site sold to another company, and the first month’s pre- to Developable Property: The Case of Rentokil,” Journal mium due to the first was paid from funds received of Environmental Planning and Management (v.45/2, 2002). from the second. Money from the sale of the fake policies went into Equity’s account. Since the price REBECCA S. KATZ paid by other insurance companies was so much MOREHEAD STATE UNIVERSITY higher than the premiums due on earlier policies, Equity’s cash assets skyrocketed. With massive revenue flowing in and only a few employees needed to carry on the fraud, Equity Equity Funding Scandal began to legitimize operations by hiring real agents. With the ever-increasing flow of money from forged THE EQUITY FUNDING Corporation of Amer- policies, Equity could offer insurance products that ica was a life insurance company capitalized in 1960 no other company could match. Offers included 294 ethics life insurance with a cash-value so high, the insured contingent upon culture and dependent upon time paid virtually no premium for coverage. Sales vol- and situation. This is because different groups of ume naturally increased giving Equity an ever-ex- people profess to believe in the correct way to be- panded market share, causing its stock price to go have, and promulgate various codes of behavior up on average 166 percent annually. Such a well-per- and values that are claimed to cover all eventualities. forming stock attracts investors. Labor unions in- These codes often conflict with each other and, vested pension funds and colleges and universities from an analytical-ethical perspective, most have added Equity stock to their endowments. Tens of some useful content which can help people live to- thousands of private investors made substantial in- gether peacefully, but none is sufficient to deal with vestments. all the complexities of the modern world. As Equity sales and stock prices advanced, The range of possible circumstances in which other companies became worried. They had more people may find themselves and the decisions they agents than Equity, yet they could not write that might have to make are so wide that simple defini- much insurance. Some reasoned that if given a tions are inadequate. Instead, an eclectic approach is chance, Equity policyholders would also buy their required and this helps to explain the tremendous products. Taking names and addresses from policies growth of schools of business ethics, with professo- that they purchased in reinsurance deals, the com- rial chairs and peer-reviewed journals devoted to panies mailed literature offering Equity policyhold- the concept. ers their products. When all offers came back from In the business world, ethics is used in a general the post office marked “address unknown,” the sense to refer to the obligations and responsibilities fraud was exposed. of firms to their stakeholders. Stakeholders are all Equity Funding was shut down in simultaneous those individuals and organizations to whom the actions by the insurance departments of several behavior and existence of the firm is in some ways states. Quick action across the country was neces- significant. This can include employees (who rely sary to deprive Equity of a chance to cover up the upon the firm for regular wages), shareholders (who crime. Once the fraud was exposed, holding Equity anticipate return on their investments), suppliers of stock or policies was a total loss to all investors and intermediate goods and raw materials (who rely on policyholders. the firm for their own business survival), and neigh- bors (who may be affected if the firm causes some SEE ALSO form of environmental degradation), as well as insurance fraud; Ponzi schemes; scams; accounting fraud; many others. investment fraud. As large firms continue to become internation- alized, undertaking different sorts of business activ- BIBLIOGRAPHY. Raymond Dirks and Leonard Gross, ities in different countries, it is clear that they may The Great Wall Street Scandal (McGraw-Hill, 1974). James develop a complex network of stakeholders who, in Sorenson, “Detecting Management Fraud: The Role of some cases, will have competing and even contradic- the Independent Auditor,” G. Geis and E. Stotland, eds., tory calls on the firm’s attention and resources. The White-Collar Crime: Theory and Research (Sage, 1980). need for firms to ensure highest returns for share- holders and investors may, for example, conflict MICHAEL SIEGFRIED with the interests of employees, when the firm de- COKER COLLEGE cides to export jobs overseas to countries where labor costs are lower, as in the case of Aviva, which decided that more than 2,000 administrative and telecommunications answer-centre calls were to be ethics relocated to India. A particular issue of contention has arisen with ETHICS IS A WORD used to refer to a range of the growth of importance of the American busi- personal decisions relating to issues of morals or ness model, which argues that the only legitimate principles. It includes issues of morality: what is purpose of business is the constant pursuit of right and wrong and, hence, how should we live and short-term profit maximization and which is closely how should we behave? These questions are clearly associated with conservative thinkers in the United ethics 295

States and elsewhere. The American business model for example, the interface between U.S. company ruthlessly pits the firm’s responsibilities to its share- representatives and Japanese or Korean employees holders against its responsibility to any other stake- involved with the gift-giving corporate culture holder, and dictates that the latter must be widely prevalent in those countries, which has re- subservient, no matter what the cost to society and sulted in the imposition of new guidelines and the individuals. The interest in business ethics has been redefinition of the concept of bribery. further stimulated by these developments. As more states have become involved in the global trade and investment system, production ca- CONTEXT pacity has also necessarily increased and, as a result, competition between firms has intensified and the The debate about business ethics has intensified focus of competition has switched from production considerably over recent years as a result of a series values to marketing values. In other words, mar- of factors. These include the distaste shown by the keters are selling products based not so much on public concerning a series of high-profile financial what they can do, but on what they look like or scandals by firms, combined with reports of exces- what image and status they might provide. Conse- sively high levels of compensation provided to ex- quently, there is a greater incentive for marketers to ecutives, seemingly irrespective of corporate stretch the limits of description for their products performance. The U.S.-led attack on Iraq in 2003 in- and this means a greater requirement for ethical spired additional debate about the role of corporate standards to which marketers should adhere. interests in shaping foreign policy, particularly with respect to the president and cabinet’s very close HISTORICAL PERSPECTIVE linkages with the U.S. oil industry, and the contro- versial award of reconstruction contracts in Iraq Historically, all major societies have regulated busi- with the suspicion of conflict of interest. ness-state activities by recourse to the dominant re- Additionally, the entry into the capitalist mar- ligious ideology or ideologies. Combined with ket system of the states of the former Soviet specific societal, cultural, and geographic factors, Union, and the disaster of the International Mone- this led to a series of unique relationships between tary Fund (IMF) program of privatization in Russia state rulers and those involved in economic activi- have also highlighted the need to instill elements of ties. Commerce was variously considered to be a re- ethical behavior into the market system. Under warding and moral activity (in Islamic societies), a command economy systems, there is little need for necessary evil best regulated carefully (China and an ethical component since all economic decisions some other Oriental states), or a recourse from per- are driven by systematic ideology. However, as has secution for a people unable to own property in been seen in those countries undergoing transition many countries (among some Jewish societies). from command to free market economies (such as The interaction of different cultures involved in in Russia, Poland, and China), alienation of the trade generally led to the creation of markets in people from what appears to be a predatory state which customs and regulations would be blended leads to a high degree of corruption and fraud in together in the interests of trading efficiency, while business practices. remaining under political control of the domestic At the same time, the impact of globalization government. One example of this was Ayutthaya, (defined in this sense as increased availability of in- in what is now Thailand, where communities of Eu- ternational travel and of the distribution of infor- ropean, Arab, Chinese, Japanese, and other mer- mation internationally) has led to the interaction chants were able to deal with each other under between economic actors from different cultures to conditions guaranteed by the state. a much greater extent than ever before. Not only, Through markets such as these, leavened by the therefore, have business people been required to occasional external shock of a powerful new en- deal with different, and in some cases incompatible, trant into the market who was able to shake up trad- ethical standards in appropriate manners but infor- ing conditions, international standards were set in mation about those dealings is now increasingly the pre-modern era. Ethical decisions concerned available to stakeholders around the world. Conse- such issues as the degree to which contracts with quently, legislation has been required to regulate, nonreligionists must be considered valid, and the 296 ethics implications of using violence to ensure trade supporter of Korean development and increasing routes or in piracy. independence of action. At first, its mission was In the modern age, improved communications “Economic contribution to the nation,” followed and technology stimulated the creation of interna- by “Priority to human resources” and then “Pursuit tional banking and finance, as well as more sophisti- of rationalism.” Finally, it reached this position in cated transactions, which necessitated improved 2003: “We will devote our human resources and methods of ensuring trustworthiness and reputa- technology to create superior products and serv- tion. Meanwhile, labor standards remained in a ices, thereby contributing to a better global society.” rudimentary state and, as a result of the Industrial Samsung’s example is one which many other Revolution and the imposition of colonial empires, corporations have followed, it and reveals an under- grew significantly worse in many cases. standing that it is now necessary to promote the or- The 20th century saw understanding of the val- ganization as subscribing to a number of values ues of human rights, labor standards, and environ- considered important by consumers and stakehold- mental sustainability slowly seep into the business ers. However, whether they will actually conform to world, although very frequently only after lagging such standards is much less clear. behind legislation. The growth of consumerism and the civil society helped to change the global envi- ETHICAL STANDARDS ronment in favor of the rights of people to live free of ideology, whether political or religious, albeit Ethical decisions vary according to the functional only in some parts of the world. These attitudes in- department in which people are involved and their spired firms to engage with ethical concerns on a level of seniority. Functionally, the decisions facing more genuine basis, and a number of important marketing departments are different from those fac- gains was made in terms of employee safety and ing accounting or production departments. In the rights and in the responsibility taken for the safety case of accounting, international standards are of products. However, the progress of these im- promulgated and distributed around the world, provements continues to be subject to the prevail- while the growing acceptance of English as the lan- ing political climate, as some conservatives strive to guage of international business is leading toward divorce corporations from social responsibilities. shared accepted definitions of various concepts and practices. In some functional areas, international or ETHICAL STATEMENTS BY FIRMS at least national standards of behavior and ethical practice are being established to serve as a filter Firms are increasingly coming to include ethical against poor practice, but also as a barrier to entry statements of various sorts as part of their corpo- for smaller firms. rate mission, or else as some other formal part of Managers are required to perform ethically with their statements of principles. They are motivated respect to their duty, their dealing with external by a combination of philanthropy and corporate stakeholders, and with both their supervisors and citizenship, on the one hand, and the desire to de- subordinates. Depending on their level of auton- flect unwanted and negative ethical investor atten- omy, managers may also be required to make signif- tion, on the other. In some cases, the statements icant decisions concerning the firm’s relations with appear to be somewhat self-important but vision- the rest of the world. Country managers, for exam- ary, as in Ford Motor Company’s 2003 statement: ple, who represent their firm as senior manager in a particular country, may have to make decisions Our Company was built on values. They helped about complying with or rejecting local ethical sys- us succeed to this point and will support the tems which may appear to be unacceptable. These drive to a more sustainable future. To inspire us might include monopolistic distribution systems, to make our values come alive in our current payment of commissions or other special payments business practices we have adopted a set of Busi- that may be construed as bribes, or the avoidance of ness Principles for our next 100 years. international health and safety regulations. Employees are also faced with the issue of The Samsung Corporation, on the other hand, re- whistleblowing, which is the practice of alerting the veals in a series of mission statements, its role as a media or regulatory authorities of wrongdoing by Ethics Reform Act 297 the firm, whether in terms of breaches of safety or Principle 6: eliminate discrimination in respect labor standards, or else commission of internal of employment and occupation. fraud or malpractice that may be kept within the or- ganization. Environment While it is clear that the employee has a moral Principle 7: Businesses should support a precau- duty to reveal details of wrongdoing, actually doing tionary approach to environmental challenges; this in practice may be made more difficult because and of fear of reprisals and job loss. The mixed out- Principle 8: undertake initiatives to promote comes of people who have blown the whistle on greater environmental responsibility; and their employers has led the U.S. government to sup- Principle 9: encourage the development and dif- port individuals through accountability programs. fusion of environmentally friendly technology.

THE GLOBAL COMPACT The network of the Global Compact works to promote these principles and to extend their mean- Since the range of circumstances in which a deci- ing into all areas of business decision-making. One sion with ethical content may be required is so particular issue is to provide compelling reasons for wide, and the ability of individuals to obtain and firms to participate and follow the guidelines. This process accurately sufficient information to make involves focusing upon the return on investment an informed decision so limited, it is necessary to that it is possible to obtain from adhering to a stated provide guidance on basic values and moral princi- ethical code, and the need to ensure that published ples. Many organizations have attempted this and ethical statements are not only being adhered to, their efforts often reflect their own sets of interests. but are inherently meaningful and not just another In other words, they only partially deal with all the form of marketing fraud. issues required of them. As a result, the United Nations (UN) has at- SEE ALSO tempted to integrate basic building blocks of busi- corporate liability; globalization; self-control theory; ness ethics into a set of guidelines that has become board of directors; Ethics Reform Act. known as the UN Global Compact. In response to a challenge issued by UN Secretary-General Kofi BIBLIOGRAPHY. Tom Abate, “Iraq: Bidding for Con- Annan in 1999, a network of organizations and in- tract Unfairly Favors Halliburton, Rivals Say,” San Fran- dividuals published the Global Compact in July 2000 cisco Chronicle (August 8, 2003); “Letter from Bill Ford,” centered upon nine principles relating to the con- 2002 Corporate Citizenship Report (Ford Motor Company, duct of business as it relates to human rights, labor 2003): Will Hutton, “Death of Community Spirit,” The standards, and the environment: Observer (November 16, 2003): Samsung Corporation, “Values and Philosophy,” (2003); Jill Treanor, “Union Human Rights Calls on Government to Dam Jobs Flow,” The Guardian Principle 1: Businesses should support and re- (December 3, 2003); UN Global Compact, “The Nine spect the protection of internationally pro- Principles,” (United Nations, 2000). claimed human rights within their sphere of influence; and JOHN WALSH, PH.D. Principle 2: make sure that they are not com- MAHIDOL UNIVERSITY, THAILAND plicit in human rights abuses.

Labor Standards Principle 3: Businesses should uphold the free- Ethics Reform Act dom of association and the effective recognition of the right to collective bargaining; IN THE LATE 1980s, U.S. Congressional ethics Principle 4: the elimination of all forms of were under extensive public scrutiny, and the result forced and compulsory labor; was an environment that was ripe for reform. With Principle 5: the effective abolition of child labor; the Ethics Reform Act of 1989, which became law and in November 1989, Congress established restric- 298 Ethics Reform Act tions on the ways that federal employees could earn other, entirely different political office than the one money beyond their government salaries. The re- for which the money was originally donated. strictions were applied to honoraria, gifts, and cam- The Ethics Reform Act also banned govern- paign contributions. Inevitably, Congressional ment officials, including all employees of the execu- attempts to ensure ethical behavior on the part of tive and judicial branches and members and staff of federal employees stirred up controversy in the the House of Representatives, from accepting hon- media and the public. oraria for giving speeches or writing articles. The In the midst of an economic recession, the Ethics Reform Act defined honoraria as “money or House of Representatives added a provision to the anything of value for an appearance, speech, or arti- Ethics Reform Act that increased annual salaries for cle, excluding any actual and necessary travel ex- all members by approximately 51 percent. Support- penses.” This restriction, which was added to the ers of the bill argued that increasing salaries would bill at the last minute, proved to be so controversial offset the loss from honoraria and would protect that challenges reached the Supreme Court of the members from being corrupted by special interests. United States. While the intention was to limit the The Senate initially bypassed the salary raise and re- impact of special interests on federal employees and tained the right to accept honoraria. However, in re- to prohibit federal employees from acting for spe- sponse to public outcry, at the beginning of the cial interests, the end result was an outright ban on following term the Senate also banned honoraria such activity by federal employees, even when the for Senators and Senate staff, and the House of speeches or articles were unrelated to their federal Representatives voted to eliminate the pay raise. Re- jobs. actions to the raises at a time of economic crisis The ban had particular impact on the two mil- contributed to the resignation of Speaker of the lion or so employees who worked in the executive House Jim Wright (D-TX) on June 30, 1989. branch of government. Federal employees who The Ethics Reform Act also attempted to deal were adversely affected by the ban included a lawyer with the ethics surrounding the huge war chests for the Nuclear Regulatory Commission who wrote comprised of monies left over from political cam- articles on Russian history, a mail carrier who gave paigns. Ten years before, Congress had prohibited speeches about Quakerism, a Labor Department members of Congress from converting these funds lawyer who lectured on Judaism, an aerospace engi- for personal use. The 1979 law had provided a neer who lectured on African-American history, a “grandfather clause” that exempted members of Food and Drug Administration employee who Congress who took office before January 1980. The wrote dance reviews, and an Internal Revenue Ser- new act removed that exception, allowing members vice (IRS) employee who wrote on environmental who left office before January 1993 to maintain con- issues. trol of their war chests. In 1989, 179 members of After a number of unsuccessful Congressional Congress remained who had been exempted from attempts to lift the ban on honoraria, federal em- the 1979 act by the grandfather clause. ployees brought a class-action lawsuit, claiming that the First Amendment rights of all federal employ- TAKE THE MONEY AND RUN ees had been threatened by the ban on accepting payment for speeches and articles. In 1995, in Some members chose to take the war chests and United States v. National Treasury Employees Union leave Congress. Gene Taylor (R-MO), for example, (514 U.S. 527), the Supreme Court upheld the rights used his war chest to pay automobile insurance, in- of federal employees and overturned the honoraria come tax, and to host a party for his Congressional portion of the Ethics Reform Act of 1989 as it ap- staff. He then donated $52,000 to charity and wrote plied to employees ranked GS-15 and below. himself a check for $345,000. Others who left Con- Writing for a six-to-three majority, Justice John gress with huge war chests were Marvin Leath (D- Paul Stevens used the examples of writers TX) with $844,000, Doug Barnard (D-GA) with Nathaniel Hawthorne and Herman Melville who $555,000, and Robert Whittaker (R-KS) with had worked for the U.S. Customs Service to argue $524,000. that federal employees should be given the opportu- Those who remained in office were allowed to nity to make contributions to the “marketplace of use funds from their war chests to campaign for any ideas.” extortion 299

SEE ALSO money from business owners to avoid physical in- corruption; bribery; ethics; campaign finance; Ros- jury or damage (paying protection). However, extor- tenkowski, Daniel. tion exists in many forms, including: individual on individual, individual on public figure/politician, BIBLIOGRAPHY. “Congress: Money to Burn,” individual on corporation, individual on govern- Newsweek (April 30, 1990); David A. Golden, “The mental agency, politician on individual, politician Ethics Reform Act of 1989: Why The Taxman Can’t Be on corporation, labor unions and law enforcement A Paperback Writer,” Brigham Young University Law Re- personnel on individual, organized-crime operation view (v.2, 1991); Debra Gersh Hernandez, “Federal on individual, and organized-crime operation on Workers Can Receive Pay for Outside Writing,” Editor corporation, as well as certain ethnic extortion op- and Publisher (April 15, 1995); Janet Hoot, “Incumbents erations. Get The Jitters As Voters Grow Angry,” Congressional Extortive demands made against individuals Quarterly Report (August 4, 1990); Phil Kuntz, “Court and corporations, in both domestic and overseas Says Honoraria Ban Violates Free Speech,” Congressional markets, have increased in such regularity that in- Quarterly Weekly Report (April 3, 1993); David Masci, surance coverage is now offered by several major in- “Honoraria Ban Repeal Stalled by Ethics Issue,” Congres- surance carriers; insuring such risks as: sional Quarterly Weekly Report (March 30, 1991); Henry J. kidnapping/threat of kidnapping, bodily injury ex- Reske, “Speech without Fees Not Free,” ABA Journal tortion, property extortion, product contamina- (April 1995); Anita Richardson, “No Money in Free tion, and trade-secret extortion. Some insurance Speech,” ABA Journal (November 1994). carriers note their success in reducing kidnapping payments from the original demands, and usually ELIZABETH PURDY, PH.D. settling for 10-25 percent of the original demand. INDEPENDENT SCHOLAR THE HOBBS ACT

The crime of extortion is often associated with the extortion Hobbs Act, which is defined in 18 U.S.C. S 1951 (b)(2), which describes extortion as the “obtaining EXTORTION IS A CRIMINAL offense, generally of property from another, with or without his con- described as obtaining something of value from one sent, induced by wrongful use of actual or threat- party by the infliction of harm, or the threat of that ened force, violence, or fear, or under the color of infliction of harm by a second party. Extortion is official right.” Certain standards must be met for an different from theft; in a theft, the item (a physical act to be identified as extortion under the Hobbs object) of value is usually taken without the owner’s Act and for a person to be charged with violation of knowledge and/or permission, so no force is pres- the act, including: 1) Did the defendant induce or ent. attempt to induce the victim to surrender property Similarly, extortion is different from robbery; or their rights to that property? 2) Did the induce- in a robbery, violence is either present or implied, ment include either physical injury or economic not understood to be a future occurrence. Addi- harm? 3) Did the action potentially or actually af- tionally, most robberies involve the taking of a fect, delay, or obstruct interstate or foreign com- physical object, not an abstract or immovable in- merce? And 4), was the threat of physical injury or strument, that is, a reputation, future business con- economic harm wrongful—did the defendant have tracts, or occupancy of a building. Extortion often intent to obtain the property or right thereof by the involves the payment of monies to ensure that vio- threat of force? lence will not occur, sometimes referred to as pro- tection money. GANGSTER EXTORTION The generally accepted public conceptualization of extortion is one of two classifications: a politi- Similar to the irony of Al Capone being convicted cian demanding payments from persons seeking on tax evasion charges, extortion charges hastened business from a political body (corruption, bribery, the demise of fellow Chicago gangster, Frank Nitti, graft), and organized-crime figures demanding who took over for Capone. As the repeal of Prohi- 300 extortion bition reduced the income opportunities of the Individual(s) on public figure/politician. Numer- Chicago mob, Nitti looked toward extortion as a ous cases of this type have been noted in the press, source of income. with some involving blackmail, demanding money With the placement of key personnel, Nitti’s in exchange for withholding information. Recent organization gained control of the International Al- publicized cases include: A woman claiming to be liance of Theatrical Stage Employees and Motion the illegitimate daughter of television personality Picture Operators (IATSE). Monies were extorted Bill Cosby demanding $40 million to not sell her from major operators in the motion picture indus- story to the news media. A person identified as the try, including Louis Mayer and the Warner broth- paramour of basketball player Michael Jordan de- ers. In 1943, Nitti and others were charged with manded $5 million to keep their relationship from extorting over $1 million form motion-picture op- the press. erators, and one day after the indictments were is- In August 2003, an individual demanded sued, Nitti committed suicide, allegedly being $25,000 for the return of $250,000 of jewelry despondent over a possible return to prison. stolen during a baggage handling incident at New York’s JFK Airport. Other examples include a pho- SPECIFIC TYPOLOGIES tographer demanding $3.3 million from actress Cameron Diaz in exchange for the return of some Individual(s) on individual. This case type involves photographs and videotapes of her in an earlier pri- individual attempting to extort or blackmail other vate modeling session. individuals who are not necessarily public figures. In March 2003, the U.S. Attorney’s office in Prior cases have included: a tabloid news editor Miami obtained criminal indictments against 74 threatening to report (falsely) that a former police owners and operators of Florida household-moving detective’s mother had committed suicide if the de- companies, alleging their extortion by adding fraud- tective did not give him confidential information on ulent additional moving charges once the furniture the Jon Benet Ramsey investigation. Rap music per- was loaded, and refusing to release the shipment sonality Mystikal was charged with extortion of a until the additional fees were paid. In January 2003 female acquaintance by demanding the she perform a Rockville, Maryland woman extorted money certain sexual favors in exchange for not having her from persons wanting home repairs; she would arrested on an embezzlement charge. identify a victim through her employment at a floor- Other examples include anonymous bidders on ing company, offering to do the job for less, but did eBay.com who have demanded extortion payments no work after accepting money, and once the victim from other bidders to drop out of the bidding began to complain, physical violence was threat- process and not raise the price. A multi-count crim- ened against the victim and his family. inal indictment against Teamsters Local 390 (steve- Individual(s) on corporation. These cases involve dores) included extortion charges alleging that person attempting to secure something of value rank-and-file members were required to make pay- from companies by a variety of claims, including: In ments to union officials to secure not only employ- January 2003, two men demanded a substantial ment, but work in certain lucrative locations. amount of money form the Van Gogh Museum of In 2001, the former bodyguard of singer LeAnn Amsterdam, the Netherlands, for the return of two Rimes was arrested for attempted extortion, de- early Van Gogh paintings that had been stolen from manding $2 million from her in exchange for the re- the museum. A New York City stock analyst threat- turn of pictures and videotapes, and a promise not ened to release possibly damaging financial infor- to reveal confidential information to tabloid publi- mation against a Canadian company official if cations. payments were not made and, after payments were In May 2001, management of a Somerset, New originally refused, he “leaked” part of the informa- Jersey, construction company was charged with ex- tion to a local paper and reiterated his demands. tortion of its workers as management, in an attempt A computer hacker, who identified himself as to circumvent prevailing-rate laws, required workers Maxus, demanded $100,000 from an online CD to kickback part of their salaries to management company in exchange for not releasing the names under the threat of termination if the kickbacks and credit card numbers of 350,000 customers he were not paid. had obtained from the company website. A person extortion 301 demanded an extortion payment of $1 million from cases include: New York City Councilman Angel a computer software company under the threat of Rodriguez was indicted in 2002 for extorting a real- posting installation instructions for the company’s estate developer, promising to support an upcoming product that would negate the need to purchase the multi-million dollar waterfront development in ex- product from the company. In 2000, a $200,000 ex- change for $50,000 cash and the sale of three pieces tortion payment was demanded from media mogul of real estate at below market price (three proper- Michael Bloomberg, under the threat of public dis- ties valued at $1.5 million to be sold for $1 million; closure of security breaches in the company’s finan- the day after the contracts for these properties were cial transactions computer system, as verified by a signed, Rodriguez supported the development and copy of Bloomberg’s corporate I.D. sent with the the full council approved the project). demand. In January 2003, a Vermont man was in- In October 2002, Wisconsin state Senate Ma- dicted for the attempted extortion of a local hotel, jority leader Chuck Chvala was charged with 20 by offering that in exchange for $50,000 he would felonies, including extortion, in a 67-page criminal not divulge information to the local press concern- indictment that noted multiple allegations of ex- ing the illegal disposal of asbestos and lead paint on tortive transaction; two $500 campaign contribu- the hotel property (the focus of a local criminal in- tions were requested from a historical society vestigation). A serial extortionist threatened a num- lobbyist for a friendly vote, a $7,500 contribution ber of banks and retail stores in western was required from the Wisconsin Realtors Associa- Pennsylvania in 2000 by reporting the placement of tion before a state senate vote on licensing home in- an explosive device in their businesses which would spectors would be scheduled, a wholesale beer be detonated if a cash payment was not made. lobbyist was fired after refusing to pay a $1,500 Individual(s) on governmental agency. These cases campaign contribution. involve the extortion of governmental bodies, often Labor relations. These cases specifically involve concerning the threat of fraudulent litigation. Ex- the operations of labor unions and often involve amples of such cases include: A Florida doctor and the following actions, usually accompanied by the his real-estate adviser were convicted of the at- threat of force or actual force: Demand of payoffs tempted extortion of Marion County by attempt- to union representatives in violations of labor laws ing to reach a cash payment in exchange for to achieve certain concessions, solicitation of dona- dropping a civil suit, a suit that was allegedly fraud- tions to remove pickets, and as noted in the August ulent in nature. In March 2003, police and rescue 2000 Federal Bureau of Investigation (FBI) and U.S. personnel (working with local “gangsters”) blocked Labor Department’s investigation into allegations a rescue boat from delivering emergency supplies to that three United Auto Workers members extorted a cyclone-stricken island until extortion payments $200,000 and jobs for relatives to end an 87-day were made strike at a General Motors plant after intentionally Politician on individual. These cases involve prolonging the strike to procure the money and job elected or appointed political officials who use their offers. Other extortion cases of this type involve authority to extort monies or other items of value sham fees which labor unions are not entitled to; ex- from individuals, often in return for assistance in torting payments from employees for various serv- obtaining contracts. Examples of these cases in- ices (already guaranteed under labor contracts such clude: The mayor of Bridgeport, Connecticut, was as health coverage); employer payments for labor convicted of 16 criminal counts including extortion consulting to establish bogus “sweetheart unions”; for obtaining over $500,000 of benefits (cash, ex- payments demanded for unwanted, excessive, and pensive wines, designer clothing, and home im- nonexistent workers; and extortive demands made provements) from business associates in return for upon nonunion companies to vacate the market- steering city contracts worth millions of dollars to place. them and their associates. Law enforcement personnel on individual. These Politician on corporation. These cases involve cases involve the extortion of individuals or crimi- elected or appointed political officials who use their nal organizations by police officers who used their authority to extort monies or other items of value police powers either to grant specific favors or to form companies, often in return for assistance in use police resources to gain information. Actual obtaining municipal contracts. Examples of these cases include: A Washington, D.C., police lieu- 302 extortion tenant was arrested for using police computers to crime family members were found guilty of at- ascertain the identities of patrons of the Follies tempting to extort $3 million from Hollywood ac- Theater, a bar frequented by homosexuals, by run- tion hero Steven Seagal, who originally refused to ning license plates of vehicles parked there and, testify out of fear of retaliation, but was faced with after identifying married patrons, demanding contempt charges if he did not. Concerning the money to not inform spouses or employers. In June Seagal case, another organized-crime member was 2003, three Canton, Mississippi police officers were charged with threatening a Los Angeles Times re- arrested for offering to arrange for the dismissal of porter who broke the story originally; she was ap- felony charges in exchange for $6,000. proached by a man with a gun who told her to Local police in Federal Way, Washington, of- “stop;” her car windshield was smashed, a dead fish fered to “fix” a woman’s shoplifting arrest ($34 with a long-stemmed rose was left on her car. from Wal-Mart) in exchange for sexual favors. In In 2002, members of the Indian mafia at- early 2003, the chief and three officers of the Cam- tempted to extort Bollywood (India’s version of den, New Jersey, police department admitted to ex- Hollywood in Bombay) film star Hrithik Roshan, torting “thousands” of dollars from persons one of many attempts by the Indian underworld to involved in illegal activities ($130,000 paid by one extort actors, actresses, and producers. The Yakuza madam to prevent the arrests of prostitutes work- (Japanese organized crime operations) utilized ex- ing for her, bars selling alcohol after hours, and al- tortion against owners of small properties to sell to lowing an amusement company with Cuban mob developers so that large land deals could be ties to place illegal video-gambling machines in bars arranged; in this practice (jiage) developers pay the and other businesses), and persons seeking to ob- Yakuza three percent of the land’s value (which due tain or keep city contracts (towing companies were to inflated land values can often cause fees to be in required to pay “fees” to police officers to get tow the high six-figures). calls for vehicles disabled in accidents). Organized-crime operation on corporation. These In February 2003, the former Donna, Texas, po- cases involve organized-crime groups exerting pres- lice chief was convicted of multiple criminal sures on companies to obtain something of value, charges including extortion relating to demanding often associated with the construction industry. Ex- payments from drug smugglers to escort marijuana amples of these cases include: In 1998, three men shipments through city limits. In 1996, six members with ties to the Gambino and Genovese crime fam- of the nine-person Ford Heights, Illinois, police de- ilies of New York were convicted of extortion by partment were arrested on criminal charges, includ- threatening labor unrest and economic injury to a ing extortion related to demanding payments for contractor on the Newark Airport monorail proj- protection of drug sales territories, the sale of ad- ect; the contractor was told to put men on the pay- vance information on police raids, and “forcing” roll even though they would not report to work (at out other drug dealers who refused to pay. one point one “ghost worker” was taken off the Organized crime operation on individual. These payroll and labor unrest occurred until the cases involve money or objects of value from indi- “worker” was reinstated and given back pay). In viduals in exchange for either prevention of certain 2002, 27 members of organized-crime families were acts or for the non-disclosure of specific informa- indicted for extorting payments (said to be approxi- tion. Specific cases include: In August 2003, local mately $10,000 per night) from Long Island, New “gangsters” threatened the safety of British soccer York, restaurants. sensation Wayne Rooney if a percentage of his In 1996, 17 members of the Detroit, Michigan, earnings was not relinquished to the crime group. organized-crime families were indicted for extorting Both law enforcement and sporting sources have ac- payments from bookies and operators of illegal lot- knowledged allegations of Russian Mafia extortion teries, persons who would be likely not to report of one-third of the approximately 50 former-Soviet the extortion attempts to local law enforcement. In hockey players in the National Hockey League February 2002, 26 bosses and members of New (NHL), with one player being extorted for six-figure York organized-crime families were charged in a payments to “protect” his family in Russia; the pro- 137-count indictment including multiple counts of tection payment was needed after several acts of extortion; the indictment alleged that over $6 mil- property damage occurred. In 2003, organized- lion in wages and benefits were illegally obtained extortion 303 over an 11-year period (with money being obtained solve the situation, members of some ethnic groups from “no-show” workers. One fictitious worker, do not report these extortion attempts to the police. Mattlynn, received more than 1,400 checks totaling Cases of this type would include: Smugglers of ille- more than $1.5 million. Contractors who did not gal aliens across the U.S.-Mexico border who de- hire members of a certain local were threatened mand additional payments from their customers with labor unrest if members were not hired and after they cross the border—detaining the undocu- paid a premium rate. mented aliens until their family members send In May 2002, 14 members of the Laborers’ In- more funds. ternational Union of North America Local 91 were Asian street gangs often require local (Asian) arrested for extortive tactics against area contrac- businesses to pay protection money to the gangs to tors, workers, and developers, including beatings, prevent acts of violence and, as noted in New York assaults, bombings, and a $100,000 vandalism inci- City’s Chinatown, they have made businesses install dent (one taped conversation included threats of gang-owned blackjack and video-poker machines in rape against family members, specifically juveniles). their operations (similar activities have been noted In October 2002, two officers of Local 81 of the In- by Chinese Tong, Vietnamese, Korean, and Russian ternational Longshoreman’s Association were ar- gangs). A Dominican street gang, C&C, in the rested for threatening to kill the owner of a Rhode Bronx, New York City, demanded money from any Island scrap-metal company, an elected state repre- group wishing to conduct illegal-drug sales in the sentative was present at the meeting where the Mott Haven section (mostly occupied by immi- threat was issued and recorded, but he was not grants from the Dominican Republic), and anyone charged. who refused to make payments was robbed, beaten, The Yakuza in Japan committed various extor- and sometimes murdered. tion operations, with some taking advantage of Indian crime gangs extort hafta payments, from Japanese law which gives building occupants Indian business owners (jewelry stores, restaurants, tremendous rights. Senyu-ya (occupation specialists) fast-food operations.) with the amount of hafta Yakuza members will illegally occupy a building be- being a set payment according to the profit made by fore its upcoming sale for one of two purposes: to the business, with refusal to pay usually resulting in extort payment from the owner to vacate the prop- personal injuries. An Israeli organized crime opera- erty to allow the sale to proceed, and extort protec- tion in Los Angeles, California extorted protection tion payments until the sales is finalized. If the money from elderly Jewish business-owners in the owner does not pay, they stay in the building caus- predominantly Jewish community of Fairfax and, ing the price to plummet. in some cases, extorted partial ownership in busi- Additionally, the Yakuza take advantage of nesses to run “bust-out” (order large sums of mer- some Japanese companies’ desires to avoid con- chandise and then declare bankruptcy) schemes. In frontation and bad public relations by committing March 2003, members of the Philadelphia KGB, a sokaiya, corporate extortion, by threatening to ap- gang of Russian émigrés, were charged with extor- pear at board meetings to disrupt business. The ex- tion, specifically using a soldering iron on at least tortion is halted either by cash or stock payments. one victim. Yakuza operations also use extortion in their debt- As evidenced by all these examples, extortion is cutting/loan-collecting services (songiri-ya) in which rampant in the worlds of white-collar, corporate, loan payments are “recovered” by the Yakuza, and organized crime, often crossing into violent charging their client 3 percent for “collecting” the street crime. debt and, the person collected from a 5 percent fee for getting the debt holder to accept a smaller SEE ALSO amount on the loan (threat of force or force is often bribery; Capone, Alphonse; fear of crime; organized utilized against one or both parties); crime; Japan; India; Central America; South America. Ethnic extortion operations. These are a subclassi- fication of organized-crime extortion but identified BIBLIOGRAPHY. Department of Justice, Criminal Re- by the ethnic specificity of both parties. Due either source Manual 2403 Hobbs Act, www.usdoj.gov (2003); S. to a fear of law enforcement in general or a belief Mahan, ed., Beyond the Mafia: Organized crime in America that local law enforcement would not be able to re- (Sage Publications, 1998); L. Sabato, Dirty Little Secrets: 304 Exxon Valdez the Persistence of Corruption in American Politics (Time order to minimize impact and allow for adjust- Books, 1996); C. Knockers, The Measurement of Police In- ments. Furthermore, the use of the automatic pilot tegrity (Department of Justice, 2000); J. Crockett, Opera- was rare under such conditions because of the need tion Pretense: the FBI’s Sting on County Corruption in to make changes in the ship’s course. Another ques- Mississippi (University Press of Mississippi, 2003); Ko-lin tionable decision by Hazelwood was leaving only Chin, Chinatown Gangs: Extortion, Enterprises, and Ethnic- one officer in charge of maneuvering the Exxon ity (Oxford University Press, 1996); N. Jacoby, Bribery and Valdez through the gap. Extortion in the Business World: A Study of Corporate Polit- This lone officer was not given clear instruc- ical Payments Abroad (Macmillan, 1977); M. Johnson, tions regarding a course to follow nor an exact chart Crime on the Labor Front (McGraw-Hill, 1950). of the tanker’s position. Shortly after Hazelwood left the officer alone, the Exxon Valdez ran aground PATRICK D. WALSH on Bligh Reef and began leaking tremendous LOYOLA UNIVERSITY NEW ORLEANS amounts of oil. For 15 minutes, Hazelwood at- tempted to force the tanker ahead but eventually the smell of oil in the air and control room gauges, that confirmed significant losses of oil, forced the Exxon Valdez crew to stop and wait for Coast Guard assistance. While the cause of the crash and spill was attribut- THE CRASH of the Exxon Valdez in the waters off able to the officer being unable to properly maneu- the coast of Alaska represents the worst oil spill in ver the tanker, other factors played a major role. U.S. history, to date in the spring of 2004. On First, several of Hazelwood’s decisions and judg- March 24, 1989, the Valdez tanker collided with ments were highly questionable due in part to his Bligh Reef in the Valdez Narrows and spilled over impaired or intoxicated state. Second, the Exxon 11 million gallons of crude oil into the waters of company reduced the Valdez crew, meaning that Prince William Sound. many of the members were excessively overworked Scheduled for a five-day trip from Valdez, and fatigued. Finally, Exxon did not have a proper Alaska, to Long Beach, California, the tanker was recovery plan in place that could effectively deal loaded with 1,264,164 barrels of North Slope with such a disaster. crude. Just hours before the departure of the Exxon The effects of the oil spill were tremendous on Valdez, its captain Joseph Hazelwood had been the surrounding communities. The loss of marine drinking a round or two of vodka. This factor was life, wildlife, and natural resources was abundant. attributed as the primary cause of the accident. The disaster happened at a time when fish and other During the voyage, Hazelwood’s speech was slurred marine organisms were beginning their reproduc- while in radio contact with Coast Guard officials tive cycles, and the large amounts of oil devastated and, at one point, he mistakenly identified his ves- the development and threatened the existence of sel as the Exxon Baton Rouge. In addition, he made many aquatic species and mammals. Over 200,000 several questionable judgments regarding the course seabirds were lost as well as thousands of sea otters of the tanker. and hundreds of other wildlife, including deer and Due to concerns over icebergs in the sound, eagles. Hazelwood had to make a decision regarding the di- The economy of the surrounding communities rection of the Valdez. Instead of slowing down and was also significantly affected. For many families, waiting for the ice to move or have the ship work the multimillion-dollar commercial fishery indus- slowly through the ice, Hazelwood choose to turn try was dramatically altered or completely de- the tanker and enter a gap between the ice and the stroyed. In 1989, one of the primary economic Bligh Reef. The gap in this area was only one-tenth resources, salmon fishing, was completely closed. of a mile wide, almost the width of the tanker itself. While Exxon agreed to help with the recovery This meant there was little room for error. Hazel- process, it remained slow. Some 15 years later, sev- wood also ordered that the tanker’s speed be in- eral of the animals and species in Prince William creased and the ship be placed on automatic pilot. Sound had not fully recovered. Some shellfish re- Both commands were highly unusual. Normally, mained contaminated and unsuitable for human ships reduce their speed when they encounter ice in consumption. The herring population collapsed in Exxon Valdez 305

1993 and had not recovered 10 years later. In 1992 license to captain a ship. In addition, he faced crim- and 1993, pink salmon runs failed and in 1994 they inal charges for leaving command of the ship to an were severely depressed. In some instances, animals uncertified officer and was convicted of negligent have almost left the region completely. Certain discharge of oil. He was sentenced to serve 200 species of seals, sea otters, ducks, and killer whales hours per year of community service until 2004. can no longer be found in the region’s waters. The majority of the animals and species, however, have SEE ALSO very gradually recovered, yet millions of gallons of water pollution; Clean Water Act; negligence; United oil still exist in the mud and sand surrounding the States; Environmental Protection Agency. Prince William Sound area. In the aftermath of the disaster, Exxon paid bil- BIBLIOGRAPHY. Art Davidson, In the Wake of the lions of dollars in criminal and civil fines. The com- Exxon Valdez (Sierra Club Books, 1990); Christopher L. pany paid $900 million to the Exxon Valdez Trustee Dyer, “Punctuated Entropy as Culture-Induced Change: Council in 1991 to oversee the restoration of The Case of the Exxon Valdez Oil Spill,” Catastrophe & ecosystems damaged by the spill. This civil suit was Culture (James Curry, 2002); Keith Schneider, “Exxon to filed under the Clean Water Act and the Compre- Admit Criminal Count, Pay a $100 Million Fine in hensive Environmental Response, Compensation, Spill,” The New York Times (March 3, 1991); Keith and Liability Act and the money awarded repre- Schneider, “Exxon is Ordered to Pay $5 Billion for sented the largest recovery in U.S. history. Alaska spill,” The New York Times (September 17, 1994); Also in 1991, Exxon pled guilty to a criminal Molly McCammon, “Restoring Human Services: The charge and paid a $100 million fine. In 1994, a fed- Experience of the Exxon Valdez Oil Spill Trustee Coun- eral court ordered Exxon to pay $5 billion in puni- cil,” Restoration of Lost Human Uses of the Environment tive damages to help Alaskans harmed by the oil (Setac Press, 1999). spills. The court stated that Exxon acted recklessly by allowing Hazelwood to command the Valdez JASON DAVIS tanker. Hazelwood was fired by Exxon and lost his UNIVERSITY OF SOUTH FLORIDA