Corporate crime is one phrase that sends jitters down the spine of both victims and perpetrators. It is responsible for the downfall of several multinational corporations, hedge funds, and even families. It is one of the very few crimes that are easily concealable and, like other forms of crime, the longer it persists, the bolder the perpetrators become. So as not to put the cart before the horse, I would like to give background information on the menace called corporate crime, for those fortunate enough not to have lost their fortunes to it.
US Legal defined corporate crime as a crime committed either by a business entity or corporation, or by individuals that may be identified with a corporation or business entity. Corporate crime is not restricted to a particular country, it is a global issue.
However, there are different forms in which corporate crime exists. The most popular forms include:
This is the most common type of corporate crime. The Merriam Webster dictionary defines fraud as the crime of using dishonest methods to take something valuable from another person. It is simply the act of deceiving. Some of the most typical kinds of fraud (419, as we Nigerians call it) are computer fraud (credit card fraud, insurance fraud, government fraud, investment fraud – Ponzi schemes).
This includes embezzlement, blackmail, and misappropriation of fund and property.
Violation of statutory law
This consists of insider trading, tax evasion, environmental law violations (e.g. illegal dumping).
Corporate crime leads to the downfall of businesses, investors losing their money and jail time or severe punishment of its perpetrators.
We cannot talk about corporate crime without mentioning some of the infamous scandals of all time –
Enron was viewed as an energy giant as it had revenues exceeding $100 billion. It was named ‘America’s most innovative company’ by Fortune. However, its stocks soon collapsed from $90 per share to 40 cents per share and the company declared bankruptcy. Upon an investigation from SEC, it was revealed that the company was involved in illegal accounting procedures. Jeffery Skilling who served as the CEO and Andrew Fastow, then CFO, had both deceived the board of directors and hid billions of debts through poor financial reporting and the use of special purpose entities. Enron had appeared on paper as very successful but had overstated its earnings. Over 20,000 people lost their jobs and savings as a result of the Enron collapse. Jeffery Skilling and Andrew Fastow were sent to jail.
Tyco, a security systems company, was another company that was rocked by a scandal in 2002. Only a year after its CEO, Dennis Kozlowski, was named one of the top 25 corporate managers of 2001 by Business Week, it was uncovered that he, alongside the former CFO Mark Swartz, stole more than $150 million from the company, including $2 million that was used for Dennis Kozlowski’s wife’s birthday party. The trial ended with both men sentenced to prison.
Asides being one of the hottest music producers in the ‘90s, having worked with NSYNC, LFO, and the Backstreet Boys, Lou Pearlman ran one of the longest and biggest Ponzi schemes in US history, from where he gleaned more than $300 million. He convinced people to invest in two companies that never really existed and created fake financial statements to secure bank loans for over 20 years. During a bankruptcy proceeding, he was convicted of money laundering and sentenced to 25 years in jail.
Remember the movie and book titled ‘Wolf of Wall Street’? Well, it was very real. Stratton Oakmont was a brokerage house founded by Jordan Belfort and had Daniel Porush as its President. Jordan Belfort and Daniel Porush oversaw a vast seven-year scheme to manipulate the stocks of at least 34 companies, costing investors several hundreds of millions of dollars. Most of these crimes were successful because stakeholders were not vigilant and accountants, as well as founders, were accomplices. Some of the investing public also didn’t carry out adequate research on the financial stability of the companies because what they saw on paper looked good to them.
Going back a few years ago, it was thought absurd that a company or corporation could be held liable as it had no physical existence and could therefore not be subjected to the penalties attached to various corporate offenses. However, this thinking became invalid when the principle of corporate legal personality in law was established in the popular case of Salomon v. Salomon & Co. Ltd. It was decided that under a relevant Act, a company upon incorporation or registration becomes a legal person separate from its members.
In Nigeria, the Companies and Allied Matters Act Cap C20 LFN 2004 Section 65 states that: ‘any act of the members in general meeting, the board of directors or of a managing director while carrying on in the usual way the business of the company shall be treated as the act of the company itself and the company shall be criminally and civilly liable thereof to the same extent as if it were a natural person’.
However, even with this Act in place, a lot of corporate crimes have rocked the nation, one of the most well-known involving Cadbury Nigeria Plc. Cadbury, a leading company in Nigeria was discovered to have engaged in creative accounting, falsifying financial reports and overstating its profits.
Same things are known to have also happened in the Nigerian banking sector. Many banks have collapsed and several bank executives have been tried for corporate crimes. Erastus Akingbola was the Executive Vice Chairman and CEO of Intercontinental Bank. In 2009, Intercontinental Bank was the only Nigerian bank in The Bankers top 500 banks in the world. In that same year, however, he was removed as CEO because the bank showed excessive liquidity stress. Investigations pointed to an alleged theft of billions of Naira from the bank and its subsidiaries to the benefit of Tropic Finance Ltd. (where his wife was Managing Director) and other companies. In addition, he and other members of the Board of Directors also granted various loans without security to companies they were directors in.
The former CEO of Oceanic Bank, Cecilia Ibru, is known for being the first female CEO to post over N1 billion profit in a financial statement. However, she was engaged in various corporate crimes including money laundering. With the approval limit of loans being N1 billion, she approved loans of over N3 billion without the approval of the Board of Directors. She was also accused of using various companies to launder funds and acquire shares. Shareholders and investors ultimately lost out. Intercontinental and Oceanic banks are among the banks that were eventually collapsed into other healthier institutions.
The issue of corporate crime and its long-lasting effects should be given more recognition with the intent to curbing and preventing it. Over the years, the Federal Government has taken steps in eradicating corporate crime by establishing various agencies and making policies that ensure that its perpetrators are brought to justice and punished.
In 2004, the Economic and Financial Crimes Act was established, eventually birthing the Economic and Financial Crimes Commission (EFCC). Its task is to conduct investigations and enforce the laws relating to economic and financial activities. The Investment and Securities Tribunal set up by the Securities and Exchange Commission (SEC) also has the power to impose penalties on publicly quoted companies. The Central Bank of Nigeria (CBN) may also impose civil and administrative penalties on banks. The justice system in the country makes provisions for corporations to be criminally liable through the Companies and Allied Matters Act (CAMA). The Financial Reporting Council of Nigeria (FRCN) is another vehicle for guarding against crime.
Although the crime incidents have reduced, proper and adequate funding of the agencies and bodies would reduce their shortcomings significantly, equipping them to protect investments and nurture a sound business climate. Nigeria should adopt ethical practices and, where they do not yet exist, adopt stiffer punishments and penalties for perpetrators to serve as deterrents.
In the banking sector, reforms should include updating corporate governance statements prepared by banks. Educating the members of the Board of Directors of companies or organizations on their legal and ethical responsibilities as well as the penalties for criminal offenses would also help in reducing the issue.
Photo Credit: Billmoyers