110TH INTERNATIONAL TRAINING COURSE VISITING EXPERTS’ PAPERS ECONOMIC CRIME AND THE GLOBAL ECONOMY: UNDERSTANDING THE THREAT AND IDENTIFYING EFFECTIVE ENFORCEMENT STRATEGIES AND COUNTERMEASURES John D. Arterberry* I. THE GLOBALIZATION OF and prosperity of global commerce. Those ECONOMIC CRIME of us in law enforcement face an urgent challenge: effectively countering this global “Laws stop at borders, but crime does not.” crime wave by overcoming barriers Speaker at 1997 World Economic Forum, presented by institutional rigidity and Davos, Switzerland national political considerations. During the 1990s, we have witnessed the A. Defining the Threat emergence of the Global Economy from a Often termed “white collar” or “financial” largely theoretical concept, to a vital and crime, economic crime inflicts its harms in growing force in the affairs of nations. many ways. Most directly, there are the Evidence of that growth can be found in financial losses suffered by fraud victims. the airline industry. According to a recent Other harms are less apparent. At a news report, passenger volume in meeting of police officials from 23 countries international commercial flights soared in September, attendees were told that the from 26 billion passenger miles in 1960 to investment by criminals of their illicit 3.5 trillion miles in 1990. funds in the world economy is generating annual profits of some $500 billion, about While the Global Economy has 2% of the global financial activity. These developed, we have experienced a funds may not only corrupt otherwise corresponding globalization of crime. legitimate enterprises through which they Whether engaged in traditional organized flow, but also provide seed money for new crime activities like narcotics trafficking or and more damaging frauds. sophisticated economic crimes like the BCCI scandal, criminals and their crimes 1. A Menu of Economic Crimes now show no respect for political Economic or white collar crime presents boundaries or geographic barriers and itself in many forms. The crimes range exploit the jurisdictional complexities both from investment frauds that target the life to expand and to conceal their crimes. savings of senior citizens to sophisticated bank frauds that use computers to divert Increasingly, experts and leading law bank funds to hidden accounts. No matter enforcement officials are sounding the degree of sophistication, there will warnings about the threats posed by the always be common elements in the crime: globalization of crime. Economic crime lying, cheating or stealing will be at the stands at the forefront of this new wave of heart of the scheme. lawlessness that threatens the stability * Deputy Chief, Fraud Section, Criminal Division, United States Department of Justice, U.S.A. 139 RESOURCE MATERIAL SERIES No. 55 (i) Financial Institution Fraud by legitimate insurance companies. During the 1980s and 1990s, Arson for profit, staged accidents financial institution fraud has been creating sham-injury and property a prominent and persistent problem. damage claims, and inflated In the United States, we experienced automobile body repair bills are a crisis in our savings and loan examples of schemes aimed at the industry that resulted, in part, from insurance companies. pervasive fraud and other abuses requiring a massive government Alternatively, insurance response. To date, the federal businesses may simply be a clever government has suffered losses in facade for massive fraud schemes. excess of $200 billion resulting from Unscrupulous promoters will the savings and loans (S&L) debacle. establish insurance operations using “rented” or fraudulently inflated Although the S&L crisis is behind assets to satisfy government- us, financial institution fraud established capitalization and continues to be an economic crime reserve requirements. These priority for the federal government. operations often use off-shore shell Mortgage fraud inflicts losses entities to facilitate and conceal their estimated at $60 billion each year. frauds. The perpetrators collect Cheque fraud involving counterfeit policy payments from unsuspecting cheques is conducted by organized individuals and businesses before rings that range across the United abruptly ceasing operations and States and cause losses to banks of departing with the scheme proceeds. about $6 billion yearly. (iii) Government Program Fraud On a more global dimension, the Government programs and BCCI scandal demonstrated the operations also are vulnerable to vulnerabilities in regulation of fraud. Dishonest claimants in multinational financial instruction. government social welfare programs It also demonstrated the benefits undermine citizen support for this obtained through international effort and cause losses to the cooperation. Even though its citizens taxpayers of billions of dollars each were not victimized, the United year. States successfully prosecuted BCCI for defrauding its banking regulators. Health care presents a dramatic Through that prosecution the United example of this problem. In the States has forfeited more than $1 United States, health care has billion of BCCI-controlled assets, an government programs and private action that has enabled the world sector components that are equally community to compensate many of susceptible to fraud. In addition to the individual depositor victims. individual, corporate and private insurance expenditures for health (ii) Insurance Fraud care, the federal government provides Insurance fraud schemes may various health care programs that victimize either the insurer or the entail federal outlays of hundreds of insured. Many schemes seek to tap billions of dollars annually. the immense reservoir of assets held 140 110TH INTERNATIONAL TRAINING COURSE VISITING EXPERTS’ PAPERS Some estimates place spending on than the credit card. Accepted health care in the United States at universally, the credit card has more than $1 trillion each year, and revolutionized commerce and as much as 10 percent of that amount, transformed business and personal or about $100 billion, resulting from travel. The credit card industry fraud and related abuses. With such tallies billions of dollars in worldwide enormous sums of money spent each commerce annually. On the negative year, it is not surprising that frauds side, the industry suffers billions of have proliferated. Health care fraud dollars in fraud losses each year. Visa in the United States thus has alone acknowledged in 1997 annual emerged as one of the most serious worldwide fraud losses at well over domestic crimes in this decade. $700 million. The Department of Justice has Closely akin to credit card frauds instituted an aggressive enforcement are schemes in which victims’ campaign against health care fraud. identification is appropriated by Convictions in health care fraud cases criminals and used to obtain funds have increased over 300 percent since and property through credit cards Fiscal Year 1992 and hundreds of and bank accounts. Approximately millions of dollars have been returned 25 percent of credit card losses in the to the federal treasury through these United States can be traced to this prosecutions and related civil cases. relatively new crime known as “identity theft”. Identity thieves (iv) Commercial Bribery and Foreign obtain, through various fraudulent Corrupt Practices means, the personal identifying data In the private sector, one of the of their victims, including names, most corrosive and costly abuses is addresses, telephone numbers and commercial bribery. Businesses are federal Social Security numbers, victimized by dishonest employees which they then employ to gain who, in exchange for bribes, cause unauthorized access to bank and their companies to purchase defective credit card accounts. A consumer goods, enter into inflated or bogus magazine reports that more than contracts or otherwise cheat their 1000 cases of identity theft occur each employers. day in the United States. Just this year, federal law was amended to Closely related to commercial address this abuse. bribery is bribery of foreign officials by corporations seeking to obtain or (vi) Securities/Investment Fraud retain business in foreign countries. Investment and securities fraud In the United States, the Foreign blossomed during the boom years of Corrupt Practices Act expressly the world’s equities markets in the prohibits such conduct. Efforts are late 1990s. The mutual fund industry underway to obtain international in the United States, with assets of agreement on similar prohibitions. about $5 trillion, is now larger than the nation’s banking industry. (v) Credit Card Fraud Nothing symbolizes the global The euphoria created by enormous economy in personal terms better gains in the market prices of 141 RESOURCE MATERIAL SERIES No. 55 securities has led investors to discard II. COMBATING ECONOMIC caution and place their hard-earned CRIME: STRATEGIES AND funds, often representing their COUNTERMEASURES FOR AN retirement savings, to promoters who EFFECTIVE GLOBAL RESPONSE promise unrealistic profits to their A. Criminal Enforcement Measures victims. The securities industry Success in fighting white collar crime estimates about $6 billion annually requires a focused and coordinated in investor losses to securities fraud response that blends the domestic effort in the United States. with the broader international response. On the domestic front, available resources 2. Costs of Economic Crime must be applied to the most pressing Beyond the direct