Ronald J. Burke - Crime and Corruption in Organizations

Crime and Corruption in Organizations

Ronald J. Burke

This chapter serves as an introduction to understanding the causes and consequences of crime and corruption in organizations, and suggests what individuals, organizations, and societies can do to reduce corruption. It identifies central concepts and themes in this area and ends with a summary of the chapters that follow.

Ashforth et al. (2007, p. 671) define corruption as the illicit use of ones position or power for perceived personal or collective gain. Corruption includes terms such as corporate wrongdoing, management fraud, and illegal corporate behavior (Zahra, Priem, and Rasheed, 2005). Examples include embezzlement, insider trading, the padding of ones expenses, paying a bribe to get a contract, altering a financial document, and individuals receiving money or being promoted for altering a financial document. Consider the following. Intel Corp., the giant manufacturer of computer chips, is now facing new antitrust charges alleging that it threatened other computer manufacturers and paid billions of dollars in kickbacks to stop them from using a competitors chips (Diaz, 2009). Intel has already paid a US$1.45 billion fine to settle antitrust charges in Europe. The company controls 80 percent of the market, and its practices were stated as harming consumers, other companies and levels of government (Associated Press, 2009a).

In another example, JP Morgan Chase & Co. agreed to pay more than US$700 million to settle charges that it made unlawful payments to friends of public officials to win municipal bond business. As is often the case, the company neither admitted nor denied any wrongdoing (Gordon, 2009).

In December 2009 the US Securities and Exchange Commission (SEC) charged three former executives of now-bankrupt lender New Century Financial Corp. with fraud for misleading investors by misrepresenting their financial circumstances (US Securities and Exchange Commission, 2009).

Finally, the top pasta-makers in Italy were charged with price-fixing. Twenty-six Italian pasta-makers, working as a cartel, were convicted in February 2009 of raising prices to consumers by as much as 36 percent and were fined 12.5 million for restricting competition (BBC News, 2009a).

How Common is Crime and Corruption?

The 2009 PricewaterhouseCoopers Global Economic Crime Survey found that 83 percent of economic crime in 2008 stemmed from asset misappropriation or, in plain language, stealing from worka crime admitted to by 56 percent of men and 76 percent of women responding to the survey. The most common items stolen were office supplies and electronics.

The Association of Certified Fraud Examiners (2009) noted that 55.4 percent of certified fraud examiners believed that corporate fraud had risen during 20082009 due to the financial meltdown; 49.1 percent blamed financial pressures for the increase, and 88 percent believed that fraud would continue to increase during 2010. Embezzlementfraud perpetrated by company employeesincreased most strongly during the economic downturn. Ryan (2009), in an interview with Martin Kenney, quoted Kenney as saying that, in his estimate, white-collar theft had grown to US$1 billion per month between 2006 and 2009.

A survey by Sales and Marketing Management Magazine found that 49 percent of sales managers admitted that their sales representatives lied on sales calls, 34 percent admitted to having heard sales reps make unrealistic promises to customers, and 30 percent admitted that they had customers who demanded kickbacks for buying products or services (Bucaro, 2006).

One can also make a distinction between illegal and unethical behaviors. Illegal behaviors would include stealing, and unethical behaviors would include giving clients small gifts at Christmas. Some behaviors, such as bribery, are both illegal and unethical. Turning to employee theft, defined as the unauthorized appropriation of company property by employees either for ones own use or for sale to another (Greenberg, 1995, p. 154), there is evidence that this type of crime has increased during the current economic downturn. In February 2010 Sergey Aleynikov, a former computer programmer with Goldman Sachs, was indicted on charges of stealing computer codes for high-frequency trading software worth millions of dollars to the bank (Bray and Bunge, 2010). He faces the prospect of a possible 25-year prison term. Intellectual property, as well as more tangible things such as merchandise, can be stolen.

The US National Retail Foundation (2009) reported that shoplifting, termed retail shrinkage, rose only 0.08 percent in 2008, but this amounted to US$1.7 billion more in losses year-over-year. Total shrinkage in 2008 was US$36.5 billion, with three-quarters of retailers saying that the problem is getting worse. Employees account for more theft and fraud than do customers or clients: 43 percent versus 36 percent of unexplained losses. Employees fail to ring up sales to friends, or falsely ring up sales returns and put this money on to gift cards. In a strange twist, a British priest, Father Tim Jones of St Lawrence and St Hilda parishes in York, told his congregation that shoplifting was acceptable behavior by those in need when they were desperate, but only from large organizations which would pass this loss on to other consumers in the form of higher prices (Aitchison, 2009). Recent estimates place the annual cost to US organizations from fraud and theft at US$994 billion (ACFE, 2008). Crime and corruption are major problems in organizations.