COVID and White Collar Crime

There’s hardly any webinar on the effects of the pandemic that gets concluded without the wise panelists exhorting us – in Churchill’s words not to “let a perfectly good crisis go to waste..”; while we may – or may not learn, white collar criminals seem to know this better than anyone else. Hate to sound like an alarmist, but the truth is White Collar Crime (“WCC”) is on the rise and it is further expected to grow by alarming proportions – in the next few months.   

It wasn’t really the best of all possible worlds – financially, even before COVID, but the pandemic has created a vicious triangle (known as Fraud Triangle); a deadly cocktail of Pressure, Opportunity and Rationalisation which has always provided a great breeding ground for WCC. Let us see how:

Pressure: With the financial downturn, businesses are under tremendous pressure to make (or at least appear to make!) their numbers, especially when executive compensation is mostly linked to profits and the bottom line, unfortunately, is the only thing that separates success from failure in the cut-throat world of business. A situation of pressure such as this often yields itself easily to falsification of accounts, accounting malpractices, market manipulation, fraud and other financial shenanigans. 

Opportunity: What has further exacerbated the situation is presence of a great opportunity to people prone to such acts; with priorities elsewhere, internal controls, compliance and supervision have become somewhat lax. Attention – for the most part – is diverted to somehow keeping businesses afloat and saving jobs. Internal controls and incisive due diligences do not appear to be the top priority at this moment.  

What provides an even greater opportunity is the fact that governments across the world are pushing in trillions of dollars into the economy as stimulus packages & bailouts. Further, the governments are procuring (especially in sectors such as healthcare) like never before and, since time is of the essence, the usual safeguards in the process in public procurement (both in terms of pricing and quality) are being bypassed. This yields itself easily to corrupt practices. And in this, we may do well to remind ourselves that – even historically, most anti-corruption laws owe their genesis to crisis, war-time procurement, and the resultant corruption. Everyone seems to have let their guard down. Which, as history shows, is a bad idea. 

Rationalisation: The people who usually commit WCC are mostly extremely sharp people who are very good at rationalising (though terrible at being rational!). The thinking mostly is: “It’s just a change of numbers on a spreadsheet; We are not killing anyone!”, or “We are doing this to save jobs – after all, and we’ll the push the money back-in, once times are better”. This short-term thinking is extremely problematic and is further compounded by a tendency to want to remain in ‘denial’ – often despite all evidence to the contrary. There is no-one as blind as the person who doesn’t want to see, right? A crisis – in fact, is time to introspect but not many companies (and that’s true across the world and across times) have successfully engendered a culture of radical honesty where anyone can tell the emperor that “he has no clothes…”. Rationalisation and wilful blindness are rampant; meetings often mere echo chambers. This is even more problematic in times of crisis and needs to change.

The fact that the victims of WCC often are a body as diffused as ‘shareholders’, ‘investors’, ‘taxpayers’, ‘employees’ and not a single visible person – such as a 80 year old widow, makes it easier for the perpetrators to rationalise. Since one can’t see the immediate victims, as one may – in a conventional crime such as murder, one finds it easier to rationalise and have less moral compunctions. The importance of putting a face to the victim cannot be emphasised enough. 

“If I look at the mass I will never act. If I look at the one, I will.” This statement by Mother Teresa provides a great insight into the human nature and reminds us that we are more likely to act charitably to the suffering of “one” who is before us, but suffering of an abstract body such as “humanity” rarely conjures humanity within us.

So, the point is made: White Collar Crime needs to be taken seriously. But what do we do about it – as commercial organisations? Here are a few suggestions:

I) Recognising that this not the time to drop our guard: Compliance departments in organisations should in fact be working in over-drive, and there should be frequent checks and trainings/hygiene drives should be ramped up too, especially for those organisation which do business in areas having a lot of government interface, and areas which are tightly regulated and considered high-risk traditionally – such as healthcare/ defence;  

ii) Putting in place ‘adequate procedures’ to ensure that corrupt practices do not take place. Having ‘adequate procedures’ to check corruption – in place is also a defence under the new Prevention of Corruption Act (“POCA”) where – for the first time – even commercial organisations can also be prosecuted for corruption, and not just errant individuals; 

iii) Expedients such as creation of ‘ethical hotlines’ that provide an anonymous, safe and easy reporting mechanism.

iv) Change in corporate culture: A strong corporate culture of zero tolerance of corrupt practices; (In other jurisdictions, courts are increasingly looking into ‘corporate culture’ while deciding as to whether, in a given case, acts of employees/agents can be attributed to a corporation, or not and whether a company can be criminally liable in a case)

iv) Protection of whistle-blowers and better incentives. We, as a legal system, really need to get our act together on not just protection of whistle-blowers but protection of witnesses – in general, who are the eyes and ears of the system. Also, barring tax laws and some law on insider trading- no indian law currently incentivises whistle-blowers. We, as human beings, function on incentives and having better incentives and protection for whistle-blowers will go a long way in strengthening corporate compliance.

For a general discussion of the way white collar crime prosecution in India needs to reimagined, read here : https://bharatchugh.in/2020/07/03/taking-white-collar-crime-seriously/

The Author is a Delhi based Advocate (bharat.law06@gmail.com)

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