Subject: Business
Objective: By the end of the lesson students should understand the core concepts of fraud, embezzlement, and money laundering, what they look like, and why they’re wrong
The Good, The Bad, and the Ugly - Fraud, Embezzlement, and Money Laundering
Tuco (left) and The Man with No Name (right) in The Good the Bad and the Ugly. (Image source: https://popculturalstudies.wordpress.com/2021/01/23/tuco-and-pathos-in-the-good-the-bad-and-ugly/)
“If you work for a living, why do you kill yourself working?”
The sad truth
Just to be clear, the only ‘Good’ in this is that it’s good to know about these so you can be sure you steer very clear of each of them. The things we’re about to discuss have ruined lives, ended businesses which innumerable people counted upon, and rocked the world with scandal after scandal. While I’d love to say that the crimes were a thing of the past, I assure you there will sadly be more of them for you to study and learn from down the road. Please, do yourself a favour and learn from these so that you know to recognize them, but never be complicit with anything even remotely resembling such an act. Here we go!
Elizabeth Holmes once a 19 year old CEO biotech entrepreneur convicted of four counts of criminal fraud in 2022. (Image Credit: Ethan Pines https://www.thetimes.co.uk/article/elizabeth-holmes-the-theranos-empire-swiftly-reduced-to-rubble-rjkkpv52r)
Fraud
Elizabeth Holmes is a name you may be familiar with. In 2003 she was a 19-year old up-and-coming biotech entrepreneur, in 2022 she was found guilty of four counts of fraud and is (at the time of writing this) soon to sentenced to up to 20 years in prison. What did she do? Her team was developing blood testing technologies, and she had learned from her lab directors that there were flaws in the technologies; she then proceeded to tell investors that everything was effectively going as planned and there were no issues - she lied.
“Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,”
In presenting herself and her organization as postured to provide the public with a product that would solve an issue, then continuing to collect funds - all the while knowing that the product was not living up to expectations and would likely fail, she effectively was hocking modern snake oil. Even that statement is a little less appropriate likely than it should be, given that the original sellers of snake oil were apparently purported to be selling the legitimate product.
There are many forms of fraud: credit card fraud, tax fraud, securities fraud, etc., but for the broader purposes of this course we’ll define fraud as any intentional act wherein a person intends to violate the rights of a person or group of people/organization and/or to stand a personal gain (as the two are not necessarily mutually exclusive). I should also point out that while I selected Ms. Holmes because she was the most prominent and recent person to come to mind who has been found guilty of fraud, she is hardly alone. If we were to include tax evasion, the list of celebrities would include the following people who have at one time or another been found guilty:
Way back up in the woods among the evergreens Mr. Chuck Berry himself was once found guilty of tax evasion! (Image Credit: https://slicethelife.com/2020/04/15/the-660-songs-which-shaped-rock-and-roll/)
Martha Stewart (No, I’m not talking about insider trading here)
Wesley Snipes
Lauryn Hill
Ja Rule
Mike ‘The Situation’ Sorrentino
Stephen Baldwin
Darryl Strawberry
Fat Joe
Chuck Berry
Nick Cage
Willie Nelson
Toni Braxton
Sinbad
Marc Anthony
It should be noted that not everyone in this list was found guilty directly, some had documents filed by representatives but were still held accountable. Ignorantia juris non excusat and all that.
Embezzlement
This is a pretty broad umbrella for a number of different forms of financial crime. It can involve you skimming money off the top of an organization’s funds which have been entrusted to you (siphoning), or it can take the form of a person stealing tangible (items) and intangible (intellectual property, etc.) properties from an organization. Exploiting the payroll system (perhaps through overtime or in data falsification) in order to take advantage or adding friends/family/etc. to the payroll or granting them contracts/kickbacks, these are forms of embezzlement as well.
Hands-down the single most famous case of fraud and embezzlement in recent history was the Enron scandal. This scandal rocked the world in 2001 with its bankruptcy, and to be fair, it also includes MASSIVE elements of fraud (which is why it’s going to be the first profile you study in this course). In short it’s a definitive lesson in the need for ethical third-party oversight, effective legislation, the power to enforce ethics standards and accountability - given that the EXECUTIVES’ ACTIONS COST THEIR WORKERS THEIR RETIREMENT FUNDS. If you make enough to pay out $681 million to your top executives, then why not short the little guy, right? While you read this please keep in mind that this story represents 29,000 people losing their jobs. That’s a lot of families struggling to find a new direction because of the decisions of a few, and they’re left without the funds they counted on.
Money Laundering
Sitting at an average estimate of $2 TRILLION U.S. DOLLARS PER YEAR this one is so huge that it’s been defined by the United Nations itself! In the 1988 Vienna Convention Article 3.1 it’s detailed as “the conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions.” That’s a heck of a mouthful, but you should just consider it to be taking money obtained illegally and filtering it through a legal entity for the purposes of hiding where it came from and making it usable again. The video seen here might even make it more simple that I just tried to, but I should warn you, that while Breaking Bad is at points entertaining, the consequences for these actions in real life are very much not.
A clip from the hit television show Breaking Bad where money laundering is pretty effectively explained.
The term itself actually hails from Al Capone who bought a string of laundromats between 1925 and 1931 and was thought to have laundered upwards of $1 billion during that time. It’s comprised of a series of three stages: Placement or ‘Smurfing,’ Layering, and Integration. While Breaking Bad did touch upon two common forms with laundromats and car washes, it’s also frequently organized through gambling, loans, currency exchanges, and things like cash-based/focused business blending, where the funds are blended into the clean funds in non-traceable transactions.
Why would an individual or criminal organization want to do this? The reality is that otherwise funds can be rather easily tracked, and things like large purchases/incomes would draw significant attention from law enforcement and tax agencies. They have a vested interest in making whatever funds they have seem legitimate should they want to avoid prosecution.
Lifetime Assignment
Don’t participate in any of these activities. For the love of all that is good - Please. Just. Don’t.