A Typology of Profit-Driven Crimes

3. Detailed Analysis of Selected Cases (continued)

3. Detailed Analysis of Selected Cases (continued)

3.7 Fraudulent Bankruptcy

The white collar equivalent of a bank heist is probably a bankruptcy scam. Put in the simplest terms, the following steps occur:

  1. An entrepreneur creates, or better, takes control of a company, preferably one with a solid credit rating.
  2. He/she begins on credit to build up inventory, initially relying mainly on suppliers’ credits.
  3. At first business appears to run normally, sufficiently so that, in addition to increasing amounts of suppliers’ credits, the entrepreneur may qualify for a bank loan.
  4. He/she quickly runs up inventory.
  5. He/she diverts inventory to cash sales on the black market, hides the money, and then declares bankruptcy, sticking the suppliers and/or bank with the loss.

Obviously there are countless subvariants, some of considerable complexity, but they all contain within them the core concepts of building creditor confidence and secretly stripping assets before letting the company collapse. These scams are very difficult to prosecute, particularly if the stripped assets have been well hidden and the scam artist does not give away the game by ostentatious living. In common with most forms of commercial crime, it is hard in practice to pinpoint just where bad business judgement ends and deliberate fraud begins.

Professional bankruptcy artists have a harder time today than in recent decades. Credit checks tend to be tighter, particularly if the applicant has a previous history of bankruptcy; more effort goes into tracing and reversing fraudulent conveyances; and accountants tend to have higher standards, because they are increasingly being held liable for the consequences of sloppy audits. That problem of tighter bank credit checks meant that when the two entrepreneurs responsible for the Premium Sales debacle, who had a history of dubious bankruptcy and scrapes with regulators, went looking for capital for their commodity arbitrage business (in this case dealing in grocery and beauty products), they had to turn to private investors.[12]

Although the term arbitrage is mostly employed with respect to financial or primary commodity transactions, it is also present in markets dealing with standardized consumer goods. Those working the trade seek out excess inventory in one area and divert it to another. (That is why it is also sometimes called diverting.) The profits per unit are small, but the volumes can be enormous.

Generally manufacturers of processed food items or non-prescription health and beauty products sell at different wholesale prices in different areas. But they usually attempt to avoid dealing with arbitrage houses (i.e., diverters) in favour of selling directly to final distributors. However that is not always the case. A regional distributor for a large brand- name manufacture might have an excess of inventory – a small part gets placed with local retailers and the rest sold off to an arbitrage house. Even when manufacturers attempt to make it a policy to avoid "arbs", there are ways of ensuring supply. A diverter might, for example, get some grocery wholesaler or a small retail chain to act as a front, deliberately overbuying, then reselling to the diverter. The grocer gets product at the same privileged rate as a larger one would, earns a small mark-up on the diverted excess, and might even benefit from the cash discount producers offer to buyers who pay on time; the diverter gets a supply of brand-name product that can be either directly arbitraged into another market ("flipping") where there is a temporary shortfall and therefore above-average prices, or stockpiled ("warehousing") pending market changes. In short, the milieu is already grey – producers practice price discrimination while diverters act through business fronts to disguise the purpose of large-scale purchases.[13]

The key is to always have a ready supply of cash to move quickly to take advantage of market imbalances and price fluctuations. Take the Premium Sales Scandal: Cash was bound to be a problem for the two gentlemen with dubious business histories  because no major bank would touch them. In the final analysis, all the funds but those from a small credit line, from a Florida bank whose officers were suspected of complicity, came from well-to-do private investors, mostly from Montreal or Florida.

The process began with a group of friends and associates of the two schemers. They would each set out to solicit groups of private investors to join partnerships, ultimately 21 of them, on the promise of returns up to 60%. (There were also a number of persons enticed into financing particular transactions, but they accounted for only 5% of the total money raised.) Very large volume, the fund-raisers claimed, permitted the exceptionally high rate of return. The pitch was successful because:

  • many fund-raisers also invested;
  • the fund-raisers relied on personal and business contacts for solicitation;
  • investors were given fabricated monthly reports attesting to transactions;
  • the firm boasted at peak $2 billion in annual sales and assets of $500 million, when in fact annual trades were never more than $300 million and assets $100 million;
  • investors in Florida or on holiday could visit the facilities to see warehouses packed with goods and trucks constantly coming and going;
  • early investors were actually paid very high "returns" – out of money being put in by new investors.

Ultimately a pool of nearly $500 million in investable funds was accumulated. Yet even the most cursory investigation into the diverting business would have shown that no amount of volume could have generated a 60% gross return in a business where (unlike arbitraging of financial instruments or primary commodities) operating costs for transportation, warehouses, computer systems, etc. are very heavy and margins are usually 2-3%. Costs were particularly high for Premium because of its practice of hiring friends and relatives of the two schemers at high salaries, and giving them corporate credit cards with unlimited credit, dream vacations, and luxury cars. Then, too, the probability of meeting the promised returns were slightly compromised by the weight of hundreds of millions of dollars that were siphoned off through a network of more than 200 bank accounts in 40 different institutions in places as varied as Switzerland, Israel, and Panama.

Yet Premium actually began as a legitimate diverting company. Investors were informed when a flip was about to occur. Premium would, from its Florida headquarters, fax the details. Investors would wire money to suppliers and receive payment back from purchasers. Premium at that stage received only a commission for arranging the flip and shipping the goods.

Then, as the business got better entrenched, the investors were instructed to send the funds to the suppliers, Premium would ship merchandise to buyers, buyers would repay Premium, and Premium would pay the investors. That gave Premium temporary control of investors’ funds on the return loop. Premium could then delay or divert the funds at will. At this stage, for the first time, some of the supposed deals did not exist. Trades were invented and bogus invoices created to lull the investors.

In the third stage, Premium requested the investors wire money to cover trades directly to Premium accounts, Premium shipped the goods, Premium received payment, and Premium then undertook to send money back to the investors. At this point Premium had full control of the flows of both goods and money. More of the trades were bogus, but investors were assured by phoning some fifteen "confirmers," some working directly for Premium and others bribed employees of wholesale distributors. Nonetheless, much of the business was genuine – Premium still bought and sold goods, and financial movements had to be linked to transactions, real or imaginary.

In the fourth stage the operation degenerated into pure fraud. For fully 90% of reported transactions, there were no suppliers. By that time no less than seven Premium employees were busy forging invoices which joined the daily faxes to investors. Confirmers became proactive, actually initiating calls to reassure investors, with sufficient success that some no longer required any confirmation. Some investor partnerships even gave Premium direct control over their partnership bank accounts. Furthermore, instead of repaying investors after each deal, Premium had arranged for them to accept payment on a fixed schedule, in effect converting a pool of commercial credit into a quasi-security. In the meantime a system of 25 shell companies, mainly in Puerto Rico, were busy posing as wholesale grocery firms, while in fact their main purpose was to divert the investors’ funds offshore.

At least $250 million were lost – the total will never be known, because some investors were using funds they had stashed abroad in secret accounts to evade taxes and hence could never come forward to complain. But in the final analysis the law cannot be faulted. The FBI was already snooping around Premium before the collapse, and once the U.S. Securities and Exchange Commission caught wind of a potential problem – after an article in Forbes revealed the shady past of the two investors – it moved quickly to shut the operation down, quickly enough that the principals were almost all caught. Partly the problem was the sloppy performance of auditors and other professionals who caught the wave of enthusiasm and convinced investors the plan was solid. A cursory check of the diverting business would have revealed that the promised rates of return were simply impossible. But mainly the problem was the blindness of the investors themselves, dazzled by the prospect of such high returns. Indeed, that raises the central problem of how, in such cases, to determine the point where people who seek fantastic deals become victims not just of the venality of the apparently offending party, but of their own greed, something no law can hope to address or change.

3.8 Telemarketing Scams

No potential offence under the criminal code seems to occupy as grey an area as telemarketing scams. Probably with none is the border between sharp business practice and outright fraud so fuzzy. Indeed, the key in so many instances is precisely to straddle the line between legality and illegality. That is the only way they can combine profitability with longevity. In addition, there are almost always jurisdictional issues – telemarketing is usually inter-state, inter-provincial, or international because that reduces likelihood of a) people showing up at the place of business to complain, and b) law enforcement troubles from local authorities. Further muddying the waters, as the term telemarketing is popularly used, by police forces as well as the general public, it includes all manner of straight-forward cons that have nothing whatsoever to do with marketing. When the term is employed in such a promiscuous way, it really comes down to a crime of using the telephone to con people out of their money. In that sense it resembles the offence of wire and mail fraud. This may be handy in so far as it permits a prosecutor to  convict on an additional charge. But, by diverting attention to a technological nicety, namely the tools used to commit the offence rather than the offence itself, it does tend to trivialize the real offence.

For purposes of this typology, all the telephone-mediated acts that simply con people out of their money or valuables with no pretence to actual sale of goods or services will be presumed standard predatory offences. These include things like the Free Travel Gift scheme.  Someone phones to say to the victim, "You have won a $10,000 lottery but…" they have to pay a gift tax of $2,000 to claim the prize. Once the victim pays, receives nothing, then calls the initiator to enquire, the victim is told he/she actually won $100,000, but gift tax is $8,000, and so forth. In fact more than 40% of incidents reported under the category telemarketing actually have nothing to do with sales. (See Appendix IV.)

Here the focus is on actual sales of goods and services that involve either outright lying or gross misrepresentation of either the product or the terms of sale. If a customer receives absolutely nothing, and that was the intent all along, it is moot as to whether the offence belongs in the predatory or commercial category. But where there is actual transfer of goods or services in exchange for negotiated payment, the appropriate category is clearly commercial. There is a victim, albeit that status is sometimes not as clear as in the predatory category; there is an apparently voluntary exchange of money for goods or services, but with the terms misrepresented; the transaction takes place through an apparently (and possibly truly) normal business context; and the transfers occur using normal bank instruments.

Typically a telemarketing scam starts with a small, cheaply leased office in a place some distance from the clients. In Canada, Montreal has been for some time the centre of action. While some specialize in fraudulent security sales, most of these operations  migrated to Amsterdam back in the 1980s.[14]Nonetheless their methodologies are common to other forms of telemarketing. One group, known as openers make cold calls or accumulate client lists or even place ads in prestigious publications offering free investment advice or subscriptions to investment newsletters. Once the list is drawn up, the closers move in to sell the phoney stocks. Especially good targets are tax evaders and similar types who might have trouble complaining to the authorities when they are fleeced – on the other hand, bad targets are career criminals inclined to settle disputes with baseball bats or guns. Transactions are settled by wire transfer, check, or other forms of bank instruments.

When merchandise is involved, typically the companies set up as credit card merchants. This can be difficult. Banks are generally wise to telemarketing operations and fearful they might be left holding the bag. Therefore success requires a credible business front, especially one that seems to have a history of legitimate operation and a good sales turnover. While not essential, a credit card setup is very useful, because payments can be received and processed much more quickly. If the company cannot get a credit card account, it will probably employ a courier company to make the rounds of its customers to pick up checks. The least desirable is money orders, because the entrepreneurs never know when they will have to close shop in a hurry. On the other hand, money orders and checks have this signal advantage – complaints come straight to the telemarketing company, rather than the credit card company, making it easier to appease the client.

As with security scams, the process begins with openers who do cold calls or purchase "sucker lists" of "loads" or "mooches," people who have previously bought into scams, or filled out contest cards at shopping malls. Victims are often seniors, or people looking to strike it rich, though small and struggling businesses can often be targeted through office supply scams. Then come "loaders," experienced salespeople who make the sales (and subsequently handle complaints). A third layer consists of "verifiers" who double-check to confirm the sale, finish convincing the buyer, ensure the merchandise has not been so overrepresented as to lead to legal difficulties that a sharp lawyer cannot deflect, and to verify credit card information. This step, however, is only used by companies who are in for the long-haul – the "grab-and-run" types do not bother with this precaution. On occasion, with the long-haul companies, there are also "reloaders" who go after previously victimized people to take them for more by either continuing sales or by posing as agencies who work to obtain restitution to telemarketing victims, for a price.

3.9 "Midnight Dumping"

Environmental crimes – and their prosecution - are the new growth sector. Almost non-existent before the 1970s, they exploded through the 1980s and 1990s for three reasons. One was the growing public awareness of the extent of and dangers from ecological damage; a second was a general swinging back towards criminal enforcement after two decades of favouring decriminalization; a third was that cracking down on polluters gave governments an opportunity to defend the environment, and as such, appease the electorate’s concerns, without having to face the wrath of industrial vested interests, which could have resulted from alternative initiatives.

Prior to the 1970s, hazardous waste was treated little differently than ordinary garbage – it was incinerated, accumulated at the point of production, or dumped into municipal landfills. But new regulations forced corporations who produced the stuff to assume responsibility for safe disposal, and called into existence a new breed of waste brokers, licensed haulers and government certified disposal firms, typically small and intensely competitive. The easiest way to raise profit rates was to cut corners by reducing or sometimes avoiding entirely the expensive and time-consuming process of effectively containing, neutralizing, or recycling hazardous waste products. Big corporations were often complicit – they would pay the disposal firms much less than what it should have cost to safely handle the material, with the knowledge that if the material were handed over to a licensed disposal firm, their own legal liability ended.[15] Small producing companies on the other hand would be more likely to just get rid of it on their own. The result in both cases was a boom in "midnight dumping."

Whether the job was done by the generating company or the haulage and disposal firm, the fate of the hazardous waste was the same – it ended up, as before, mixed with regular garbage in ordinary landfills, dumped in rivers or lakes, abandoned in corroding barrels in old truck trailers beside a road or in a derelict warehouse. Alternatively it might be resold in the guise of pure chemicals to unsuspecting customers, often in developing countries. Yet another way of getting rid of the stuff was graphically demonstrated in St. Basile-le-Grand in 1988 when one of the town’s volunteer fireman was hired by a waste disposer to torch a warehouse full of PCBs.

The story began when a federal Environment Ministry investigator, whose job had included the task of making an inventory of all the waste PCBs in Quebec, left the government and set up a series of companies to haul away, store, and attempt to safely dispose of the province’s burgeoning supply of discarded PCBs. For a time he seemed to be genuinely searching for a solution. But when the Quebec Environment Ministry  refused him permission to build an incinerator, and followed up by rejecting his request to build more warehouse space, he also stopped spending money to maintain his existing ones. In addition he began forging inventory statements to indicate he had collected less PCBs than he really had, permitting him to cheat on the income taxes due on what the companies paid him to haul away the stuff as well as to exceed Quebec-imposed limits. Furthermore he forged labels on barrels of liquid PCBs to fool inspectors, and sometimes moved other barrels out of the warehouses before those inspectors arrived – somehow he always knew in advance when they were due. Although he lost his license to collect more PCBs in 1985, he was still liable for those previously collected. In any case, he did not bother to tell his clients, simply creating a new transport company with no license to haul the stuff as before, therefore increasing the amount of tax-free money he could skim. Meanwhile the cash was being siphoned off to the USA The condition of his warehouses deteriorated so badly, birds flew in through the broken windows and set off the alarms. To deal with that problem, he simply cut off the alarm system. Finally came the arson job, by which time the entrepreneur had followed his money to the USA where he still resides.[16]

There is yet another, even more profitable possibility for getting rid of the stuff if it is readily flammable, namely to mix it with diesel or heating oil, and sell it as fuel. One particularly notorious incident involved a hazardous waste disposal firm in Buffalo that linked up with a distributor of bootleg gasoline. Fuel trucks would pick up the liquid wastes, in total several million gallons, allowing the tanks to fill to 10-15% of capacity. Then they would fill the rest with regular fuel. In addition, a compartment was installed at the top of the tank and filled with fuel dyed red, so that it appeared to be heating oil which is not subject to excise tax. The stuff was trucked into Canada and sold off to service stations and trucking companies at a discount of two to five cents a litre off regular prices. In short, there were three distinct sources of profit – fees for disposal of waste, reduced taxes from disguising the fuel as heating oil, and profits from the wholesaling of  bootleg automotive fuel. The scam cost Ontario at least $100 million in lost taxes during the five years it operated, while also discharging dioxin and furans into the atmosphere when the fuel was burned.

This is a clear cut case of commercial crime. Not only was there deception in the acquisition of the waste on the pretext of it being legitimately and safely disposed of, but there was also a fraud against purchasers of the adulterated fuel oil. It involved income redistribution – from the generator corporations in fees for services that were not provided and from the government in tax losses. Like all classic commercial crimes, it took place within a regular business setting and was financed by normal bank instruments.

When the story of the scam broke, there were press reports suggesting that both the disposal company and the gasoline bootlegger were "mob-linked." This is a frequent claim in cases of illegal toxic waste disposal on both sides of the border. In fact more detailed analysis suggests that in a few places where traditional "organized crime" was already powerful in the ordinary garbage business, for example, in New York and New Jersey, it was easy for their firms to move into the toxic waste disposal business as well.[17]But there are two important modifications necessary.

First, in the great majority of cases where crimes have been charged, the culprits have been regular waste disposal firms with no proven (and in most cases no imaginable) link to "organized crime." It was industry insiders who had the technical knowledge to bend or break the rules with relative impunity. Typically they did not start crooked, but went bad over time as competition stiffened and opportunity emerged.[18]

Second, even where suits citing the Racketeer Influenced and Corrupt Organizations Act (RICO) in the USA forced "mob-linked" waste haulers out of the business, as in New York, opening the market to the big corporate waste disposal firms, the results were less reductions in environmental crime than changes to the identity of whom committed it. The two largest North American waste firms both ran up a lists of criminal indictments and civil violations – for bribery, price fixing, predatory pricing, selling toxic laden waste under false labels, and midnight dumping – that would have done any Mafia don proud.[19]


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