Week 2 Discussion Analyzing Business Crimes

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"Analyzing Business Crimes" Please respond to the following:

  • Refer to Section 8-7: Examples of Business Crimes in your textbook and using the Internet identify a real example of when one of the listed business crimes from your textbook was alleged to have been committed. Next, explain why the conduct at issue could be viewed as constituting one of those specific business crimes. Lastly, construct a counterargument that supports that the issue may not be classified as a business crime. Provide support for your response.

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8-7 Examples of Business Crimes 8-7a Theft and Embezzlement The action of employees who take their employers’ property is theft or embezzlement. For theft, the following elements are necessary: (1) intent to take the property, (2) actual taking of the property for permanent use, and (3) no authorization to take the property. These three elements are the actus reus of the crime. The mens rea is the taking of the property with the intent of permanently depriving the owner of use and possession. For embezzlement, the elements are the same as for theft, with the addition of one more element: the person commits the crime while in the employ or position of trust of the property owner. In other words, embezzlement is theft from a specific type of person—an employer. Although it is usually limited to funds, embezzlement can cover such items as inventory and equipment of a business. 8-7b Obstruction of Justice Because of the cases involving the destruction of documents, SOX amended the federal law on obstruction of justice to make document destruction a specific crime and to increase its penalties. The new obstruction section makes it a felony for anyone, including company employees, auditors, attorneys, and consultants, to alter, destroy, mutilate, conceal, cover up, falsify, or make a false entry with the “intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States.”2 Obstruction can be 03572_ch08_ptg01_248-293.indd 268 8/26/16 6:09 PM NOT FOR SALE Chapter 8 Business Crime 269 committed by destroying or altering documents that are subject to a subpoena or that are related to a pending investigation, and also by encouraging others to alter or destroy those types of documents. Encouraging or giving false testimony is also a form of obstruction of justice. Martha Stewart was convicted of obstruction of justice for her alteration of phone logs, backdating of an order to her broker, and encouraging a broker’s assistant to lie to support her backdating story. The SOX provisions on obstruction also cover audit records and require auditors to retain their work papers related to a client’s audit for at least five years. Any destruction of these documents prior to the expiration of that period would constitute a felony and carries a penalty of up to 10 years. 8-7c Computer Crime What Is a Computer Crime? The term computer crime is used as though it were a completely separate body of law from criminal law. Although certain crimes can only be committed using a computer, the nature of crime, with both mens rea and actus reus, does not change. Specific statutes addressing the unique means by which property is taken and Dennis Kozlowski and Mark Swartz, the former CEO and CFO, respectively, of Tyco International, initially had a hung jury in their trial for larceny. Mr. Kozlowski and Mr. Swartz, who were eventually convicted of embezzlement, enjoyed extensive personal benefits from Tyco, an embarrassment of personal acquisition at company expense. Prosecutors must show mens rea, criminal intent. The defense that both men raised to counter intent—and apparently successfully enough to flummox some jurors in their first trial— was that none of what they obtained through the various company agreements and programs was done secretly. Both men produced evidence related to board knowledge of their perks and approvals through the established and proper company procedures for personal loans and the use of company funds for refurbishing and furnishing their homes. Along the lines of a “Why would I be such an idiot?” defense, the two approached their case as one in which the blatancy of their conduct would work in their favor in mitigating intent, or mens rea. None of the loans was made to the men without some form of authorization, however perfunctory. Many in the executive ranks and perhaps even some board members were aware of the loans, the officer loan policy, and the processes used for booking and forgiving the loans. The issue of board approval on the loans remains a question, but compensation committee minutes from February 21, 2002, show that the committee was given a list of loans to officers and also approved all compensation packages. There was no public disclosure of these developments or the committee’s review. Do you believe these facts supported the jury’s finding of mens rea in the retrial of the cases against Mr. Kozlowski and Mr. Swartz? Was their conduct ethical? Sources: Adapted from Andrew Ross Sorkin, “Judge Ends Trial When Tyco Juror Reports Threat,” New York Times, April 3, 2004, pp. A1, B4; Andrew Ross Sorkin, “After a Mistrial, Choices to Make,” New York Times, April 5, 2004, pp. C1, C6; Jonathan D. Glater, “Prosecutors See More Time in Another Tyco Case,” New York Times, April 8, 2004, p. C4; Mark Maremont, “Kozlowski’s Defense Strategy: Big Spending Was No Secret,” Wall Street Journal, February 9, 2004, pp. A1, A23; Andrew Ross Sorkin and Jonathan D. Glater, “Some Tyco Board Members Knew of Pay Packages, Records Show,” New York Times, September 23, 2002, p. A1; Laurie P. Cohen, “Tyco Ex-Counsel Claims Auditors Knew of Loans,” Wall Street Journal, October 22, 2002, p. A6. Consider . . . 8.4 Do not ever try to withhold a violation or restructure paperwork to cover it up. The truth comes out. Concealment is an additional © Grounder/Shutterstock.com crime. 03572_ch08_ptg01_248-293.indd 269 8/26/16 6:09 PM NOT FOR SALE 270 Part 2 Business: Its Regulatory Environment Ethical Issues As the financial performance of the infamous energy company Enron dipped, its audit firm, Arthur Andersen, worried that Enron’s accounting and financial statements were doubtful. On October 16, 2001, Enron refused to change its earnings release in response to Andersen’s concerns. Andersen was preparing a statement about the release. Nancy Temple, legal counsel for Arthur Andersen, e-mailed back and forth with David Duncan, the audit partner for the Enron account in Houston, about the content of the Andersen statement on Enron. Later that same day, Temple also sent an e-mail to Andersen’s internal team of accounting experts and attached a copy of the company’s document policy. On October 20, the Enron crisis-response team held a conference call during which Temple instructed everyone to “[m]ake sure to follow the [document] policy.” On October 23, 2001, then– Enron CEO Kenneth Lay declined to answer questions during a call with analysts because of “potential lawsuits, as well as the SEC inquiry.” After the call, Duncan met with other Andersen partners and told them that they should ensure that team members were complying with the company’s document policy. Another meeting for all team members followed, during which Duncan distributed the policy and told everyone to comply. These and other, smaller meetings were followed by considerable shredding and destruction of both paper and electronic documents. On October 26, 2001, one of Andersen’s senior partners circulated a New York Times article discussing the SEC’s response to Enron. His e-mail commented, “[T]he problems are just beginning and we will be in the crosshairs. The marketplace is going to keep the pressure on this and is going to force the SEC to be tough.” On October 30, the SEC opened a formal investigation and sent Enron a letter that requested accounting documents. The document destruction continued despite reservations by some of Andersen’s managers. On November 8, 2001, Enron announced that it would issue a comprehensive restatement of its earnings and assets. Also on November 8, the SEC served Enron and Andersen with subpoenas for records. On November 9, Duncan’s secretary sent an e-mail that stated, “Per Dave—No more shredding. . . . We have been officially served for our documents.” Enron filed for bankruptcy less than a month later. Duncan was fired and later pleaded guilty to witness tampering, a plea he later withdrew.3 Applying the Park case, who is criminally liable for the document shredding? The employees who actually did it? The managers who ordered it to begin? The company itself? Were they technically not in violation of the law during the document destruction because there was no formal notice until November 8? [Arthur Andersen LLP v U.S., 544 U.S. 696 (2005)] © iStockPhoto.com/dra_schwartz covering the unique type of property found in computer software and hardware make establishing computer crimes easier than reliance on traditional crimes such as larceny and embezzlement. Some computer crimes may involve a computer without making direct use of one. Ordinary criminal statutes can apply to these types of crimes. For example, a person who mails flyers that falsely advertise a service as computerized is guilty of committing the federal crime of using the mail to defraud. For more serious and costly computer-related wrongs that do not fit the ordinary definitions of crime, the trend is toward adopting statutes that define specific computer crimes. 03572_ch08_ptg01_248-293.indd 270 8/26/16 6:09 PM NOT FOR SALE Chapter 8 Business Crime 271 8-7d Internet Crime We see them almost daily, those fake antivirus message warnings, the stranded traveler plea for money, the fake escrow agent, the online banking phishing scam, and, finally, the notorious Nigerian letter frauds. We are witnesses and, too often, victims of Internet crime. There are a series of older and more recent statutes that make Internet activity criminal. The Unauthorized Access Computer Crimes There are laws at both the state and federal levels that prohibit the unauthorized access of computers and computer files. These types of statutes cover the “hacking” crimes, wherein employees tap into the websites of competitors or tap into the Outlook calendar of one of their company executives to see what issues are percolating into meetings, discussions, and documents, or they tap into employee personnel files that are private and confidential. Unauthorized computer access is a crime in all states and at the federal level. For example, a group calling itself The Impact Team released almost 10 gigabytes of data that it had obtained by hacking into the records of Avid Life Media, Inc., the parent company of the website Ashley Madison. Because that website is a connection place for marital infidelity, the release of the e-mails, names, and credit card information of users proved embarrassing to many public figures. The investigation continues as a cooperative effort between Canadian and U.S. authorities. The Electronic Communications Privacy Act of 1986 (ECPA) prohibits the unauthorized access of “live” communications, as when someone uses a listening device to intercept a telephone conversation. However, e-mail and social media are often stored information, and the question of this act’s application for the various types of Internet activity is often not a clear fit.4 The Stored Communication Act (SCA) prohibits the unauthorized interception of electronic communications, generally meaning stored communication, not ongoing communication, such as text messaging, tweeting, and instant messaging. The key to prosecution in unauthorized access computer cases is proof that the access was not authorized. The New Jersey v Riley case (Case 8.3) deals with an issue of whether an employee could be prosecuted for unauthorized access. New Jersey v Riley 988 A.2d 1252 (N.J. 2009) Snooping at Work: A Crime? Case 8.3 FACTS Sergeant Kenneth Riley twice viewed digitally stored videotape from his department’s computerized system of the traffic stops of another officer, Sergeant Robert Currier, an officer not in his unit. Sergeant Riley did not like Sergeant Currier. Sergeant Riley then permitted police personnel below sergeant’s rank to view the video. The videotapes were used not to train officers in Riley’s squad but to subject Sergeant Currier to embarrassment and discipline. Under the user terms of the department, an administrative officer or sergeant had a password to the video database that could be used to access the whole database to obtain videos for training purposes. A grand jury returned an indictment against Sergeant Riley for use of computer data without authorization and unlawful access and disclosure © iStockPhoto.com/Photoevent continued 03572_ch08_ptg01_248-293.indd 271 8/26/16 6:09 PM NOT FOR SALE 272 Part 2 Business: Its Regulatory Environment of computer data. Sergeant Riley moved to have the indictment dismissed. JUDICIAL OPINION OSTRER, Justice It is uncertain what it means, first, to access computerized data, and second, what it means to do so “without authorization” or “in excess of authorization.” It is also unclear whether unauthorized access may be proved solely with evidence that a defendant, who is an employee or other “insider” with current password access, knowingly violated internal guidelines regarding use of computer-based information. A hypothetical can demonstrate the uncertainty. One can posit a member of the information technology (I.T.) department of a business who possesses all the employees’ passwords in order to maintain the business’s computer system, but internal policy directs him not to read employees’ documents. In one sense, the I.T. professional is authorized to access every employee’s files. If a worker asks the I.T. professional to help retrieve a sensitive trade-secret-related document that the worker accidentally deleted, the I.T. professional can do so, using the passwords already provided to him. In another sense, if the I.T. professional reads the worker’s document, he may be acting in excess of his authorization. Reference to the plain language of the statute does not clearly indicate which reading is correct. Federal law defines the term, “exceeds authorized access,” to mean “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled to so obtain or alter.” That also is not unambiguous, as one may ponder what it means to be “not entitled to obtain or alter” data. Arguably, one is entitled if he has a password or codebased right to obtain or alter the data. In White v. White, 781 A.2d 85 (Ch. Div. 2001), a wife had retrieved her husband’s stored e-mails to a girlfriend from the family computer. The court held that the wife’s access was not unauthorized because she did not use her husband’s password or code without permission. In other words, unauthorized access meant access by use of another’s password or code-based right of entry. In considering the potential for arbitrary enforcement of the computer crime law, this court recognizes the ubiquity of computers today in the workplace, in schools, public institutions, and in government, and the prevalence of agreements and policies governing such use. Many of these impose unrealistic rules honored in the breach. It takes no imagination to conjure up a multitude of trivial and not so trivial violations that take place every day in the workplace. Workers use workplace computers for personal use in violation of requirements that they use their computers for business only. Workers violate policies prohibiting access to social networking sites. Reportedly, fifty-four percent of companies ban workers from accessing social networking sites like Twitter, MySpace and Facebook, yet seventy-seven percent of workers with a Facebook account use it during work hours. In sum, assuming that a broad range of the population violates internal workplace computer use policies at one point or another, then deeming such violations a crime would empower the State, unguided by firm definitional standards, to choose to prosecute whomever it wishes from that broad cross-section of the population. The vagueness doctrine is designed to prevent that. In short, the criminal law should not be some pliable material that the State may bend and mold at will to fit an unwarned defendant. Although there is a split among other jurisdictions, there is ample precedent in federal and state courts for adopting the narrow construction of “without or in excess of authorization” found in the New Jersey law. The indictment is dismissed. CASE QUESTIONS 1. Explain why the purpose of Sergeant Riley’s actions became an issue. 2. Discuss how the court uses the I.T. example to illustrate its point. 3. What are the court’s fears about a broad interpretation of “unauthorized access”? Unauthorized Use of Computer Resources In addition to the crimes of unauthorized access, there are the crimes of taking computer resources. Just as it would be theft to steal a computer, it is also theft to steal proprietary computer programs and codes from another, including, for example, your employer, and then taking those programs or codes to a new employer. The Economic Espionage Act (EEA), which is sometimes called the “verb statute,” makes it a felony to steal, appropriate, or take a trade secret as well as to copy, 03572_ch08_ptg01_248-293.indd 272 8/26/16 6:09 PM NOT FOR SALE Chapter 8 Business Crime 273 duplicate, sketch, draw, photograph, download, upload, alter, destroy, replicate, transmit, deliver, send, mail, or communicate a trade secret. The penalties for EEA violations are up to $500,000 and 15 years in prison for individuals and $10 million for organizations. When employees leave one company, their employers are permitted to check that departing employees’ computer e-mails and hard drives to determine whether the employees have engaged in computer espionage by taking proprietary information to their new employers. Many states have laws that prohibit the theft of scientific material from an employer, which could include computer codes. These statutes, as clear as they may seem, have proved to be problematic in prosecution as “the demands of the digital age . . . require further refinement of . . . criminal laws.” [People v Aleynikov, 15 N.Y.S.2d 587 (2015)] For example, Sergey Aleynikov, a computer programmer, was prosecuted by both state and federal authorities for allegedly taking source code for high-frequency trading from Goldman Sachs, where he had worked for $400,000 per year, to Teza Technologies, a high-frequency trading firm. In the federal case, he was charged with a violation of the EEA and convicted, but a federal appeals court held that computer source code did not constitute stolen “goods” and that source code was not covered by the EEA. [U.S. v Aleynikov, 676 F.3d 71 (2nd Cir. 2012)] Mr. Aleynikov was then tried by the State of New York for unlawful use of secret scientific material, and after a messy jury verdict, a court held that there was insufficient evidence to establish intent to appropriate material and that he had not taken any tangible material. Spamming Spamming, the act of sending thousands of e-mails at once to many different computer users, is regulated at the federal level by the Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act. Under CANSPAM, private companies can bring suit against spammers for their unauthorized use of Internet Service Providers (ISPs). Spam attacks can be devastating and have resulted in retaliatory Internet wars. In March 2013, security experts indicated that “the biggest cyberattack in history” was actually a battle over the unalienable right to spam. Spamhaus, a Dutch company that fights spam, added Cyberbunker to its spam blacklist. Spamhaus’s blacklist consists of companies that e-mail providers use as a screen to weed out spam. Cyberbunker is a Web-hosting service that pledges to host any site except “child porn and anything related to terrorism.”5 Cyberbunker lives on spam and Spamhaus wants to prevent spam, so cyberspace wars result. Because of the international nature of these activities, prosecution is difficult and requires law enforcement cooperation across borders. Using Computers to Commit Fraud The Counterfeit Access Device and Computer Fraud and Abuse Act (CADCFA) makes it a federal crime to use or access federal or private computers without authorization. The CADCFA also covers additional new technologies, such as scanners, handheld computers, laptops, and smartphones. The Crime of Cyberbullying In 2008, a federal grand jury indicted Lori Drew in what would become the first of many cases that criminally charged a cyberbully. Ms. Drew had created a MySpace site for Josh Evans, a fictitious teen boy she used as a means of getting information from Megan Meier, a 13year-old girl with whom Ms. Drew’s daughter had a teenage rivalry/disagreement. Josh pretended to be interested in Megan but then said that she was “fat” and that the world would be a better place without her. Megan 03572_ch08_ptg01_248-293.indd 273 8/26/16 6:09 PM NOT FOR SALE 274 Part 2 Business: Its Regulatory Environment hanged herself within an hour of receiving those messages from “Josh.” Ms. Drew was later charged and convicted of conspiracy and accessing computers without authorization.6 Since the time of that case, there have been a number of similar incidents in which friends, parents, and others harass individuals using the various sites available from Facebook to Instagram. States now have very specific cyberbullying statutes for prosecution. As one expert phrased it, we have to take responsibility for what we post online and the consequences that can stem from hurtful or fearsome comments. There are both civil and criminal statutes that provide curbs for victims. Civil remedies allow for injunctions and criminal penalties are at a level that allows them to serve as a deterrent for the types of postings that began with the Drew case. Copyright Crimes Online Using the Internet for downloading copyrighted music and movies without authorization or payment is both a civil and criminal wrong. The discussion of those issues can be found in Chapter 15. Crimes Online The Internet often seems to be a place of anonymity, but those who use the Internet for criminal activity can be prosecuted using ordinary criminal statutes. For example, Ross Ulbricht, the founder and operator of Silk Road, a sort of eBay for drug transactions, operated the encrypted site using the “nom de Internet” of “Dread Pirate Roberts,” accepting only bitcoins as payment. However, following overdose deaths of six people who used the site for purchases, investigators were able to determine his identity. Mr. Ulbricht was convicted of being a drug kingpin and sentenced to life in prison. The Internet is also a source for child pornography, and those who solicit, post, and view such materials online are subject to federal prosecution. For example, Jared Fogle, the former spokesperson for Subway, was charged and entered a guilty plea to Internet child pornography charges and was sentenced to 15 years and eight months and fined $175,000. Mr. Fogle is also required to pay $1.4 million in restitution to victims. 8-7e Criminal Fraud Business crimes against individuals usually result from sales transactions. Criminal fraud is an example of this type of crime, the elements of which are the same as those the person defrauded would use to establish a contract defense: a false statement was made; the statement was material, that is, it was information that would affect the buying decision; and the person relied on the statement. The only difference between contract fraud and criminal fraud is that criminal fraud requires proof of intent that the seller intended to mislead the buyer for the purpose of effecting the transaction and making money. In the mortgage fraud cases brought against borrowers during 2008–2012, the basis for the fraud is that documents and appraisals were forged or falsified. In many cases, criminal intent was established because the loans had two sets of documents and always the same buyers. 8-7f Commercial Bribery Most states have provisions that govern both the giving and receiving of gifts or funds in exchange for a contract or favor. A supplier offering a purchasing agent of a company $25,000 in cash as an incentive or reward for choosing that supplier has 03572_ch08_ptg01_248-293.indd 274 8/26/16 6:09 PM NOT FOR SALE Chapter 8 Business Crime 275 committed commercial bribery. The purchasing agent has betrayed his employer’s interest and compromised his judgment by accepting benefits for himself. This condemnation of bribery in commercial transactions dates back to the first eras of business activity because of concerns that quality and pricing would suffer if corruption were introduced into the bargaining process. 8-7g Racketeer Influenced and Corrupt Organizations (RICO) Act The RICO Act (18 U.S.C. §§ 1961– 1968), a complex federal statute, was passed with the intent of curbing organized crime activity. The ease of proof and severity of penalties for RICO violations have made it a popular charge in criminal cases in which organized crime may not actually be involved. Ethical Issues Jim G. Locklear was a purchasing agent. His spectacular career as a buyer began in 1977 with Federated Stores in Dallas, Texas. Federated officers described him as a man with an eye for fashion and a keen ability to negotiate. In 1987, Mr. Locklear was offered a position with Jordan Marsh, a retailer in the Boston area, with an annual salary of $96,000. Citing a desire to return to Dallas, Mr. Locklear left the Jordan Marsh position after only three months. He returned to Dallas as a buyer for JCPenney at an annual salary of $56,000. Mr. Locklear did a phenomenal job as the buyer for the JCPenney Home Collection. JCPenney was the first department store to feature coordinated lines of dinnerware, flatware, and glasses. During Mr. Locklear’s tenure as a purchasing agent, Penney’s annual sales for his area of its tabletop line went from $25 million to $45 million. After receiving an anonymous tip, JCPenney hired an investigator to look into Mr. Locklear’s conduct. The investigator found and reported that Mr. Locklear had personal financial difficulties. He had a $500,000 mortgage on his home and child support payments of $900 a month for four children from four previous marriages. Mr. Locklear also had a country club membership, luxury vehicles, and large securities accounts, and he was known to take vacations at posh resorts. Despite the puzzling lifestyle revealed by the investigator, JCPenney took no action. In 1992, JCPenney received an anonymous letter disclosing a kickback situation between Mr. Locklear and a manufacturer’s representative. JCPenney investigated a second time, referred the case for criminal prosecution, and filed a civil suit against Mr. Locklear. The investigation conducted by authorities found that Mr. Locklear received payments from vendors through several corporations he had established. During the five-year period from 1987 to 1992, Mr. Locklear had received $1.5 million from vendors, manufacturers’ representatives, and others. Mr. Locklear was charged with commercial bribery and entered into a plea agreement. Mr. Locklear also served as a witness for the prosecution at the trials of those who paid him the bribes. A vendor described his payment of a $25,000 fee to Mr. Locklear as follows: “It was either pay it or go out of business.” Mr. Locklear was sentenced to 18 months in federal prison, less than the five-year maximum, due to his cooperation. Should JCPenney have known of the difficulties earlier? Was Mr. Locklear’s personal life responsible for his poor value choices at work? Is anyone really harmed by Mr. Locklear’s activity? Wasn’t he a good buyer? 03572_ch08_ptg01_248-293.indd 275 8/26/16 6:09 PM NOT FOR SALE 276 Part 2 Business: Its Regulatory Environment For RICO to apply, a “pattern of racketeering activity” must be established. That pattern is defined as the commission of at least two racketeering acts within a 10-year period. Racketeering acts are defined under the federal statute to include murder; kidnapping; gambling; arson; robbery; bribery; extortion; dealing in pornography or narcotics; counterfeiting; embezzlement of pension, union, or welfare funds; mail fraud; wire fraud; obstruction of justice or criminal investigation; interstate transportation of stolen goods; white slavery; fraud in the sale of securities; and other acts relating to the Currency and Foreign Transactions Reporting Act (an act passed to prevent money laundering). RICO provides for both criminal penalties and civil remedies. In a RICO civil suit, injured parties can recover treble damages, the cost of their suit, and reasonable attorney fees. According to the Journal of Accountancy, 91% of all RICO civil actions have been based on the listed pattern crimes of mail fraud, wire fraud, or fraud in the sale of securities. The statute has been used frequently against corporations. For example, Northwestern Bell Telephone Company lobbyists who took public utility commissioners to dinner and hired two of them as consultants after they left their commission jobs were sued under RICO. A lawyer representing phone company customers successfully brought a RICO civil suit based on an alleged pattern of bribing the utility regulators. [H. J., Inc. v Northwestern Bell Telephone Co., 492 U.S. 229 (1989)] There are also RICO civil actions brought against government agencies and officials for extortion but also in eminent domain cases and in situations in which government officials have imposed expansive requirements for regulatory licensing. For example, in Wilkie v Robbins, 551 U.S. 537 (2007), a landowner tried to bring a RICO suit against federal officials for alleged retaliatory behavior because the landowner refused to grant an easement to the government for use of the land. Another portion of the RICO statute permits prosecutors to freeze defendants’ assets to prevent further crimes. When RICO charges are brought against corporations, the seizure of corporate assets can mean the termination of the business. For example, in U.S. v Patel, 949 F. Supp. 2d 642 (W.D. Va. 2013), prosecutors seized over $20 million in cartons of cigarettes alleged to be contraband. The Justice Department has issued guidelines requiring prosecutors to seek a forfeiture of assets in proportion to the crime rather than seize all of the business assets. A growing number of states have enacted their own versions of the RICO statute for application at the state level. RICO violations are added charges in many criminal cases. For example, if someone is charged with ongoing bribery of a state or local official, RICO charges can be added because of the pattern of corruption. In Reves v Ernst & Young, 507 U.S. 170 (1993), the accounting firm of Arthur Young (later merged into Ernst & Young) was hired to conduct audits for the Farmer’s Cooperative of Arkansas and Oklahoma. An investment by the coop in a gasohol plant proved to be a financial disaster, and the farmers who held co-op notes that had served as the organization’s means of financing over the years lost their investment when the co-op filed for bankruptcy. The investors filed suit against Arthur Young for violations of federal securities laws (see Chapter 18) and RICO. However, the Supreme Court exempted the accounting firm from RICO charges because it found that the firm did not participate in the management of the co-op. The auditor’s participation was not that of directing the co-op’s affairs, only that of offering its opinions on the financial statements of the firm. Over the years, businesses have lobbied heavily for reforms to the broad civil and criminal liabilities created by RICO. Congress has not yielded to changes in a statute that appears to have deterrent mechanisms. 03572_ch08_ptg01_248-293.indd 276 8/26/16 6:09 PM NOT FOR SALE Chapter 8 Business Crime 277 8-7h Business Crime and the USA Patriot Act The Money Laundering Control Act (MLCA), 42 U.S.C. § 5301, prohibited the knowing and willful participation in any type of financial transaction that was set up in order to conceal or disguise the source of funds. Since the attack of 2001, federal investigators have found intricate financial networks in which funding for terrorism activities was concealed. As a result, provisions of the USA Patriot Act, passed fewer than two months after the September 11, 2001 destruction, include substantial expansion of the MLCA as well as the Bank Secrecy Act (BSA). Regulation of Money Laundering Under the current versions of the federal laws, title and escrow companies; brokerage firms; travel agents; check-cashing firms; auto, plane, and boat dealers; loan and finance companies; casinos; currency exchanges; branches of foreign banks located in the United States; and even small businesses are subject to disclosure and reporting requirements for transactions involving cash or transactions of more than $10,000. In addition, the types of accounts covered under the disclosure requirements include not just savings accounts but also money market savings and brokerage accounts. Few financial institutions are exempt from reporting and disclosure requirements for cash transactions. Businesses affected by these amendments developed new policies and procedures for preventing and detecting money laundering. Under the Federal Sentencing Guidelines, businesses subject to these anti–money-laundering provisions must have a “Know Thy Customer” program that trains employees in how to spot money laundering and suspicious activities by customers. Funneling Money to Terrorist Groups Another portion of the Patriot Act makes it a crime for companies to pay monies to terrorist groups in other countries. For example, a company that pays a mercenary group for protection for its employees or facilities would violate this provision of the act. Under federal law, once an organization is designated by the U.S. government as a terrorist organization, companies cannot continue to do business with them because the purpose of the law is to curb funding to and money laundering by terrorist groups. The list of terrorist groups is available from a website the government provides to businesses via subscription. Between 1997 and 2004, executives in Chiquita operations in Colombia paid $1.7 million to the United Self-Defense Forces of Colombia (known as AUC, its initials in Spanish). The AUC, according to the U.S. Justice Department, “has been responsible for some of the worst massacres in Colombia’s civil conflict and for a sizable percentage of the country’s cocaine exports. The U.S. government designated the right-wing militia a terrorist organization in September 2001.”7 The payments were made through a Chiquita wholly owned subsidiary known as Banadex, the company’s most profitable unit by 2003. The payments began in 1997 following a meeting between the then–leader of the AUC, Carlos Castaño, and a senior executive of Banadex. No one disputes that during that meeting, Castaño implied that Chiquita’s failure to make the payments could result in physical harm to Banadex employees and property. No one disputes either that the AUC was known for such Consider . . . 8.5 03572_ch08_ptg01_248-293.indd 277 8/26/16 6:09 PM NOT FOR SALE 278 Part 2 Business: Its Regulatory Environment violence and had been successful in obtaining payments from other companies, either following Castaño’s meetings with company officials or, when the companies declined, by carrying out the threat of harm as a form of warning. By September 2000, Chiquita’s senior executives were aware that the payments were being made and were also aware that the AUC was a violent paramilitary organization. Chiquita officers, directors, and employees were aware of the Banadex payments to the AUC. Chiquita recorded these payments in its financial reports and other records as “security payments” or payments for “security” or “security services.” Beginning in June 2002, Chiquita began paying the AUC in cash according to new procedures established by senior executives of Chiquita. These new procedures concealed direct cash payments to the AUC. From September 10, 2001, through February 4, 2004, Chiquita made payments to the AUC totaling over $825,000, part of the $1.7 million paid from 1997 through 2004. On February 20, 2003, a Chiquita employee, aware of the payments to the AUC, told a senior Chiquita officer that he had discovered that the AUC had been designated by the U.S. government as a foreign terrorist organization (FTO). The Justice Department discovered the following sequence of events in response to the employee having raised the issue: Shortly thereafter, these Chiquita officials spoke with attorneys in the District of Columbia office of a national law firm (“outside counsel”) about Chiquita’s ongoing payments to the AUC. Beginning on Feb. 21, 2003, outside counsel emphatically advised Chiquita that the payments were illegal under United States law and that Chiquita should immediately stop paying the AUC directly or indirectly. Outside counsel advised Chiquita: “Must stop payments.” “Bottom Line: CANNOT MAKE THE PAYMENT [.]” “Advised NOT TO MAKE ALTERNATIVE PAYMENT through CONVIVIR [.]” “General Rule: Cannot do indirectly what you cannot do directly [.]” Concluded with: “CANNOT MAKE THE PAYMENT [.]” “You voluntarily put yourself in this position. Duress defense can wear out through repetition. Buz [business] decision to stay in harm’s way. Chiquita should leave Colombia.” “[T]he company should not continue to make the Santa Marta payments, given the AUC’s designation as a foreign terrorist organization[.]” “[T]he company should not make the payment.” On April 3, 2003, a senior Chiquita officer and a member of Chiquita’s Board of Directors first reported to the full Board that Chiquita was making payments to a designated FTO. A Board member objected to the payments and recommended that Chiquita consider taking immediate corrective action, including withdrawing from Colombia. The Board did not follow that recommendation, but instead agreed to disclose promptly to the Department of Justice the fact that Chiquita had been making payments to the AUC. Meanwhile, Banadex personnel were instructed to continue making the payments.8 On April 24, 2003, Roderick M. Hills, a member of Chiquita’s board and head of its audit committee, Chiquita general counsel Robert Olson, and, some reports indicate, the company’s outside counsel met with members of the Justice Department to disclose the payments and explain that they had been made under duress. Mr. Hills, a former chairman of the Securities Exchange Commission, and the Chiquita officer were told that the payments were illegal and had to stop. The payments did not stop, and the company’s outside counsel wrote to the board on September 8, 2003, advising that “[Department of Justice] officials have been unwilling to give assurances or guarantees of non-prosecution; in fact, officials have repeatedly stated that they view the circumstances presented as a technical violation and cannot endorse current or future payments.”9 03572_ch08_ptg01_248-293.indd 278 8/26/16 6:09 PM NOT FOR SALE Chapter 8 Business Crime 279 8-7i Additional Federal Crimes Many of the statutes on business crimes are found at the federal level. Violations of the Securities Exchange Acts (Chapter 18), the Sherman Act (Chapter 14), the Internal Revenue Act, the Pure Food and Drug Act, the environmental statutes (Chapter 10), the Occupational Safety and Health Act (Chapter 19), and Consumer Product Safety statutes (Chapter 13) carry criminal penalties. 8-7j State Crimes Similar criminal statutes at the state level cover such areas as criminal fraud and securities. In addition, states have particular regulations and laws for certain industries. The sale of liquor in most states is strictly regulated. The result is an increase in bribes and kickbacks in these highly regulated industries as businesses try to work around the regulatory restrictions. State attorneys general have increasingly taken the lead on prosecutions related to the financial markets, prosecuting such cases as those involving analysts and insurance bid-rigging.
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Explanation & Answer

Attached.

Running Head: ANALYZING BUSINESS CRIMES

Analyzing Business Crimes: Embezzlement
Student’s Name
University Affiliation

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ANALYZING BUSINESS CRIMES

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Introduction

Embezzlement is a business crime that occurs when an individual knowingly withholds
or uses cash or assets of a company or business for purposes that it was not intended for (Bartz,
Strock & Harris, n.d). It is also known as financial fraud or larceny and is usually committed by
a company employee who has been placed in charge of the finances of the business or an
individual who has some responsibility as far as the assets of a business are concerned.
Example of embezzlement cases
In February 2011, Chri...


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