Published On: Sat, Jun 23rd, 2018

Tax Payer Billions Spent On Victimless Crimes: DOJ, FBI, Prisons, Welfare, Trump

White collar crime is not a new idea. The term was first coined in the late 1930s when Edwin Sutherland addressed the American Sociological Society. The definition of white collar crime is not strict or fixed, but today it is widely accepted as covering a variety of financial crimes and frauds – non-violent crimes that are committed in commercial situations, for large financial gain.

Some of these crimes are serious and have a huge negative impact on consumers. Some of these crimes damage the environment. These crimes are indeed serious, and it would be a rare person that would take the stance that such crimes should not be punished, but the resources that are being put into solving and punishing these crimes are huge, and those who are victims of violent crime or even personal theft would be within their rights to wonder why such resources are being thrown at victimless crimes, when the police are too over-stretched and under-funded to attend an assault or domestic violence case promptly.

Crime Scene Tape photo/edited pic from FBI.gov

Someone Will Always End up Paying – The Taxpayer

The government has spent more than $300 billion on investigating victimless crimes. Those funds have to come from somewhere, and that means that other services will have to suffer. Either taxpayers are forced to pay more tax or resources are taken away from day-to-day policing or other services. Either way, the man on the street loses out. Punishing victimless crimes rarely makes the world a better place, and it is all too common for innocent people to get caught in the crossfire.

Take the example of the wire fraud case surrounding 5LINX. The founders Craig Jerabeck, Jeb Tyler and Jason Guck have been charged with money laundering and wire fraud, reportedly pocketing more than $4 million of the company’s revenue themselves. The defense attorneys say that the men had compensation contracts which allowed them to do exactly that. The agreements allowed them to earn money in much the same way as the independent salespeople and recruiters did. There was nothing in their contracts disallowing such actions.

photo TaxRebate.org.uk

According to Jerabeck’s attorney, James Nobles, the contracts explicitly allowed the men to receive additional income, however, it was not clearly stated how that income would be taken. Jerabeck eventually went on to plead guilty to conspiracy to commit wire fraud and the filing of a false tax return, and has agreed to testify against Tyler and Guck. Tyler also recently plead guilty to filing a false tax return for 2014, albeit he specified that his tax returns were not accurate between 2012 and 2015. This leads to some interesting questions.  

The investors in the 5LINX case have profited millions, maybe even more than the alleged fraud, to begin with. The contracts that the team had were blurry. It could be claimed that they were perhaps unethical in some ways, and there are certainly those who dislike the MLM model that 5LINX was based on. There is a huge difference between a company’s business practices being perhaps less than ethical and a company breaking the law, however.  Tyler and Guck argue that they were not acting unlawfully, following what was written in their contracts.

Acting in Good Faith

Tyler and Guck are not the only people who have ended up caught out by the success that got away from them. Bob Morgan is an industry icon, but he was accused of bank fraud when his real estate company was found to have been using bogus financial statements to secure large loans for various projects. Morgan allowed his nephew, who was VP of the real estate development company, to manage a lot of the finances.  

Morgan’s nephew wanted to secure loans instead of using the company’s own money, but he knew that banks require a minimum debt service coverage ration, or DSCR, to offer those loans. He used statements that showed the required DSCR for each loan and stated his intent to do so in more than one internal email. Bob Morgan’s nephew is the one that committed the fraudulent acts. Morgan, however, is the one who runs the company. Should he be punished for the acts of someone who was an employee? His future hinges on whether it can be proven that he read the emails and responded to them. What did he know, and what did he enforce? More importantly, why is a huge amount of taxpayer money being spent punishing a property developer for lying to a bank, when there are unsafe apartment complexes, drugs, ailing education systems and violent crimes to worry about.

Scale of Justice photo/DTR via wikimedia commons

The DOJ’s Political Agenda

The Department of Justice is revising its white collar crime policy, and it is clear that there is a highly political element to the approach that they are taking. Trump has, from the moment he took office, looked to cast off any legacy that was left behind from the Obama era, and the DOJ has a political agenda too, with the new policies calling into question the old Obama administration commitment to charging individual executives for the crimes of their company.

Attorneys for the DOJ are changing official guidance for prosecutors, and while the changes are still to be fully determined, Deputy Attorney General Rod Rosenstein told the Heritage Foundation, that “corporations, of course, don’t go to prison, they do pay fines” he asked whether it is possible to deter corporate crime through prosecuting corporations, or whether individuals should be the ones being prosecuted. In his view, it is sometimes necessary to prosecute individuals. So far, the government has struggled to prosecute corporate criminals because it is difficult, and complex, to tie the actions of a corporate entity to a specific person. That’s evident in the face of 5LINX, which is, in the grand scheme of things, a comparatively small corporate entity.

Once defendants make the executive decision to have a trial, it puts pressure on the prosecutors to show real evidence to prove their findings to a judge or jury. Conversely, this kind of forced need does a 180-turn when the accused submit a guilty plea. For the court systems and especially judges, the holy grail of proof is when someone admits to guilt.

Photo of the US Constitution taken in the rotunda of the National Archives photo Mr. T in DC via Flickr

Our U.S. Constitution diplomatically guarantees a defendant has the right to a jury trial. Although this may seem promising, the statistics paint a different story. In 2015, of all the case proceedings conducted through our federal court system, merely 1.6% of defendants whose case was adjudicated actually had a trial with a jury. Only 0.8% of all defendants forfeited their rights to a trial by jury and chose to be tried by a judge. As a result, approximately 1 out of every 63 defendants in our federal court system is convicted by a jury, and unsurprisingly, 1 out of 42 is convicted after a trial.

Regardless of a defendants decision, the risk is too great to have a trial in U.S. federal courts. In addition, just 258 of the 3,024 defendants in 2015 were acquitted after their trials. That’s a daunting 1 in 12 chance of an acquittal. What’s more shocking is the 41 out of 42 defendants in 2015 were convicted by pleading guilty.

Within the pool of trials and guilty pleas in 2015, the federal court conviction rate was a whopping 99.8% — only 258 acquittals, and primarily 126,802 convictions. There’s no question that this was no accident since the conviction rate was 99.76% in 2014.

This shift by the Trump administration is just one in a long line of pronouncements relating to white collar, victimless crimes. In 1999, the then deputy attorney general Eric Holder warned prosecutors that they should consider the collateral consequences that could occur in corporate criminal cases.  

Corporate prosecutions have been on the downturn. In July 2017 there were just 436 white-collar cases – an 11 percent fall from the same period in the previous year, and a 35 percent fall from 2012. The attention that Trump is turning towards such cases, however, is evidence that the DOJ wants to put the spotlight back on corporate cases. The Western New York District DOJ, in particular, has been targeting white-collar crime, and it raises the question of why the department is so eager to punish white collar criminals when these are victimless crimes while there are violent crimes, robberies, assaults, and harassment taking place on a daily basis.

Business Benefits Everyone

Successful companies and the business owners who run them give a lot back to the local community. This is something that John Kennedy was very vocal about. Those big companies may not be above the law, but punishing them for crimes of accounting, while it makes for nice headlines, does not make a difference to the day-to-day lives of the average individual.

We do not want headlines. What we need is to see results. Giving young people, who are joining gangs, a positive outlet for their energies makes a much bigger difference than stopping an executive from filtering profits into his pocket. Spending tens of millions on stopping a few million in wire fraud may look good on the surface, but funding a drug addiction center would likely offer much more benefit to the state.

Exploiting The Prison System

Many of the criminals in these cases of victimless crimes end up going to prison. It is not uncommon for people serving time in U.S. prisons to be used as very cheap labor. In 2016, we saw the largest workforce strike in U.S. history, with more than 24,000 prisoners, from 29 prisons spread across 12 states protesting against what they claim to be inhumane conditions. The strike was timed to match with the 45th anniversary of the Attica Prison protests.

The Incarcerated Workers Organizing Committee wanted to draw attention to one of the worst-kept secrets in the U.S. prison system. Prisoner abuse is still rampant today, and the exploitation of prisoners as a cheap workforce is something similar to modern day slavery.  Corporate America is exploiting prisoners as a workforce. The Prison Industry Enhancement Certification Program which was introduced in 1979 permitted U.S. companies to make use of prisoners to perform a variety of jobs.

Since the introduction of that program, the population of U.S. prisons has increased massively, and profits for companies that participate in the program have soared as well. Revenues for the government and for private contractors associated with the prison system is also on the up. The Federal Bureau of Prisons has a program called the Federal Prison Industries. On paper, what they offer sounds promising – inmates get paid to work, and they get to learn skills so they could be rehabilitated into society. The truth is not so rosy, however. The program generated $500 million in sales in 2016, but workers saw very little of it. Inmates are paid less than one dollar an hour to do menial jobs.

In 2017, California’s prison labor program alone was expected to produce $232 million in sales. That’s a huge amount of money for a program that is fed through draconian sentencing and criminal justice policies that lock people up for a huge range of crimes. In some states, one in every 14 African American men will spend time in prison. It’s not just violent criminals that are being put to work for very little pay. Non-violent criminals are being put to work as well and exploited to make participating corporate organizations money – while it’s taxpayer money that is going towards pursuing these convictions and maintaining the prisons.

It costs $28.4 billion per year to run state prisons – an average of $22,632 per inmate. Incarcerating more people in order to support companies participating in the work programs may benefit those companies, and the companies that run the prisons, but taxpayers are still contributing a lot of money to the system. Is locking up people who juggled bank statements the most productive use of that money, when there are violent criminals still walking free, and the prisons are still demonstrably over-crowded, under-staffed, and failing to rehabilitate the people who are incarcerated?

The Rich Get Richer

America is supposed to be the land of the free and the home of the brave, but the legal system is structured in a way that allows the rich to get richer while the poor are left with an almost impossible climb. The American dream of “pulling themselves up by their bootstraps” is becoming harder and harder to achieve. To quote the Australian band Midnight Oil, “The rich get richer, the poor get the picture”.

The emphasis now is on the rich committing crimes, and other rich people getting richer by punishing them. If some of that money truly did filter down to the middle and working class people, and those who are working hard to make ends meet but are facing stretched finances and difficult situations, then it would be easier to get excited at the news that a wire fraud scheme had been identified and caught. When the main benefit to the bottom line, however, comes in the form of more income for corporate America, the headlines begin to wear on us.

Welfare Fraud and Making Ends Meet

Unemployment in the USA is falling, and that should be a pleasant statistic, but welfare fraud is still rampant. It is difficult to obtain reliable evidence about exactly how serious the welfare fraud issue is since only those who are caught can be included in the statistics. Surveys into attitudes surrounding welfare fraud, however, show that many, if not most people on welfare fail to report their income properly. In addition, more than 80% of people surveyed say that they would be willing to cheat the welfare system if the risk of being audited was just one in six.

Welfare Fraud is a victimless crime, just like Corporate Fraud – but it’s one that produces a different emotional response. Most people who commit Welfare Fraud do so to procure only modest sums of money because they are genuinely struggling with poverty. The problem comes when those people reach financial stability and continue to defraud the system.

The U.S. welfare system is creaking under the strain of an increasing number of claims.  The most recent statistics date back to 2012 when the Social Security Administration said that it was able to detect frauds that cost the government more than $253 million. That’s a huge amount of money, and clamping down on fraud would likely save the government a fortune. Compare that statistic, however, to the fact that white collar crime investigations are costing the government $300 Billion. Priorities, somewhere, are out of line.

No Crime is Truly Victimless

There are many crimes that are considered to be victimless. Some, such as underage drinking, is controversial. The law sets a specific age for people to drink because of the potential harm that could be caused to an underage person. Young people lack the maturity and judgment to use alcohol safely. Some crimes are victimless because it is an individual doing something small – downloading a movie does not feel like stealing because it is copying, rather than taking a physical product. Not all acts of piracy result in a lost sale, so quantifying the damage in this kind of crime is hard. Sharing pirated content likely does cause at least one lost sale. An individual may feel that “the movie studio makes enough money”, but the feelings change when it is their own content that is being copied or shared.

Corporate crime occurs on a much larger scale. A NASDAQ listed company failing to pay taxes is costing the government money and is, therefore, reducing the amount of investment that can be made into public services.

The Trump administration’s emphasis on tackling white collar crimes is one that has produced some interesting headlines. However, while we are collectively expressing outrage at the millions being lost in fraud, and pouring over cases of ignored emails and wilful deceit, what is happening elsewhere in the political landscape? Big, faceless corporations and the rich white men that run them make a convenient enemy at a time when the USA is on the brink of trade wars, and when our leadership has skeletons of its own.

Today, being an entrepreneur can be an intimidating and difficult proposition. The penalties for getting things wrong are scary enough that there is the perception that it is better to simply not try. This is the antithesis of the American Dream, and it is time for us to call for change, and to break out of this poverty trap.

Author: Charlie Brown

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