White-collar crimes are crimes that affluent people commit in the society due to their position of influence or occupation. In this context, fiduciary fraud is a type of white-collar crime in which a person or financial institution entrusted with money or property commits by going against the terms and conditions of a contract. This essay explores white-collar crime of fiduciary fraud and its prevalence in various fiduciary relationships by examining certain case studies. Moreover, the essay examines why the public and government are susceptible to white-collar crimes, particularly fiduciary fraud. Ultimately, the essay gives an overview of factors that contribute significantly to the occurrence fiduciary fraud in financial institutions.
Fiduciary is a person or a financial institution that clients have entrusted with management of their property or money. In this case, fiduciary has legal and ethical responsibility to manage property and money according to terms and conditions of an agreement made between the client and the fiduciary. Moreover, fiduciary has a noble duty of advising, protecting, and acting on behalf of clients as a trustee. However, because the fiduciary is in a position of influence, it can breach terms and conditions of agreement and act to satisfy own interests against client, thus committing a white-collar crime called fiduciary fraud. According to Economic Policy Research Institute (2006), fiduciary fraud is a white-collar crime that financial institutions or professionals commit by contravening an agreement and acting against the interests of their clients (p.2). Since financial institutions manage a great deal of money and governments hardly regulate the institutions, they are free to commit fiduciary fraud.
Although fiduciary fraud occurs in various companies and institutions, some fiduciary relationships are more prone to fiduciary fraud as compared to others. For example, fiduciary fraud is most common in fiduciary relationships such as the board of directors/company, banks/clients, stockbrokers/investors, trustee/beneficiary, agent/principal and partner/partner. The fiduciary fraud occurs most in these relationships because it involves entrusting a lot of money to fiduciary coupled with influential powers, which prompt the fiduciary to breach the contract and a commit white-collar crime by defrauding their clients. Croall (2009) asserts that, people that are in influential positions commit white-collar crimes for they have immense powers to defraud their clients and influence legal proceedings in their favor (p.78). Therefore, to defraud their clients and customers, the fiduciary employs several tactics such as promising high compensation rates with low premiums in case of insurance companies, offering high interests rates in bank savings, cheap mortgages in real estate, and manipulation of stocks in stock exchange markets.
Both the government and the public are prone to fiduciary fraud since perpetrators are highly sophisticated. According to Herrick (2008), fraudulent activities of fiduciary are very subtle for perpetrators sophisticatedly conceal their activities by creating an illusion of effective management systems and profitability (p.3). Hence, fiduciary crimes are very complex, technical, and convoluted, which makes it hard for prosecution procedure to obtain reasonable evidence that can incriminate suspects. To defraud their clients and customers, the fiduciary claims to have corporate relationships with offshore enterprises that do not exist and purport to be carrying out mega transactions with them, yet they are insolvent. Offshore companies act as partner companies that enhance the public image of the fiduciary and attract more clients before defrauding them. The fiduciary may claim that the offshore companies are creditors, which owe a lot of money in an attempt to cover up cases of fraudulence and state of insolvency. Sorle (2011) argues that, it is difficult to detect fiduciary fraud since it encompasses several transactions and companies (p.7). Therefore, detection of a fiduciary fraud is very difficult which exposes both the public and the government to this white-collar crime.
Economic experts argue that slow economic growth that occurred in 1970s, high rate of interest, and poor management in 1980s provided the basis for white-collar crimes in Savings and Loans Industry. Moreover, insider fraudulent activities involved desperation dealing, embezzlement, and concealing of fraudulent activities. In desperation dealing, the society had too much confidence in Savings and Loans Industry, which prompted the industry to use illegal means of maximizing profit. Embezzlement occurred collectively as insiders realized that it was their time to get rich quickly. Ultimately, due to bankruptcy within the Savings and Loans Industry, the insiders used auditors, lawyers, politicians, and accountants to cover up insolvency. What contributed to insolvency of Savings and Loan Industry is poor management, political influence, and deregulation by the government. Vaughn (2010) argues that, poor regulation and assessment of financial institutions by the government predisposes them to white-collar crimes (p.741). Due to the inability of government to regulate the Savings and Loans Industry, white-collar criminals took advantage and employed techniques such as reciprocal lending, false transactions, nominee loans, and funding of offshore enterprises.
Croall, H. (2009). Victims of White Collar and Corporate Crime. Journal of Criminal Justice, 79-108.
Economic Policy Research Institute, (2006). Managing Fiduciary Risk and Protecting Programme Success. Department for International Development, 1-12.
Herrick, F. (2008). Fiduciary Liability in a Financial Fraud. Economic Journal, 4, 1-9.
Sorle, S. (2011). Corporate White Collar Crime. John Jay College of Criminal Justice, 1-13.
Vaughn, C. (2010). Power Corrupts: Honest Services Fraud and Fiduciary Duties. Washburn Law Journal, 50(6), 713-742.