Strategies for Small Businesses to Protect Against White-Collar Crime

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When many people think of white-collar crime, they think of the top 10 most famous white-collar criminals including Bernie Madoff, Martha Stewart or Charles Ponzi. People who commit crimes in large business settings where millions of dollars are treated like thousands would be in a small business. However, white-collar crime does not discriminate and in times of recession, fraud and theft in particular become more rampant. In truth, it’s not just Bernie Madoff scamming millions of dollars from hundreds of people. It’s a long-trusted bookkeeper of a small business who starts by skimming small amounts, which over time grows to significant sums of money.

White-collar crime includes lying, cheating and stealing in a business setting. These crimes cost the U.S. $300 billion annually, according to the Federal Bureau of Investigation (FBI) and some of these losses are sustained by small businesses. Crimes by public officials indirectly impact small businesses as well. For example, in Dixon, Ill., the city comptroller was indicted for stealing $53 million from the city to finance her horse breeding business and lavish lifestyle. This type of crime is devastating to small businesses that bear a heavier tax burden because of decreased government revenues, and suffer from an unfair advantage from fraudulent capital infusion to a competitor.

Crimes by Employees of the Company

In addition to crimes by public officials, small businesses suffer direct losses by crimes committed by employees, who are often longtime associates. Often, as a result of limited resources, a small business will have one bookkeeper who is the sole signatory of checks, and also prepares the accounting and financial statements.

Allowing one individual to have that much power over a business exposes the company to potential money laundering, embezzlement and tax evasion charges. It often starts out very small. The bookkeeper will think laundering $100 or so will not affect the company, but if it goes unnoticed, it then becomes easier for the employee to justify more substantial thefts. To protect a company against this type of crime the following strategies can be implemented:

  • Have two signatures required on company checks, this will ensure that more than one person is aware of all company disbursements; 
  • Have an independent accountant perform an audit on company financials. This does not need to be a full-blown, certified audit and it does not need to be done annually, but biannual audits are a good idea.  

If one or both of these procedures are implemented, a trusted employee will be less tempted to engage in theft or money laundering. For the city of Dixon, Ill., independent oversight could have saved the city $53 million in alleged losses.

Crimes of Fraud by Vendors Who Contract with the Company

In addition to crimes by employees, vendors also commit white-collar crimes against small businesses. There are a few scenarios for this type of crime: 1) The company buys a bulk order of pens from a company offering them at a significantly lower price, but after delivery learns the pens are only half full of ink; 2) The company buys lightly used office furniture, but soon after acquisition discovers the wheels in the desks and chairs are severely broken down; 3) The company gives a deposit for needed supplies, but soon after rendering payment the vendor is nowhere to be found.

To prevent against these types of consumer fraud, the company can implement the following procedures:

  1. Create a fraud awareness program for employees (the National White-Collar Crime Center has several links to resources about crime prevention);
  2. Create a policy where board (or committee) approval is necessary before making purchases so more than one company representative is asking questions about a new vendor; and
  3. Create a policy where all new vendors must be investigated prior to executing a contract, one simply way to investigate a vendor is to search the Better Business Bureau.

 

Strict Liability for Environmental Crimes in Some States

As a business owner, you may be held liable for the crime of another without knowledge or intent of the crime. This is known as strict liability and in some states (such as Pennsylvania) businesses are strictly liable for environmental crimes. For example, though more likely to occur with larger businesses, if  Business A acquires land from a seller and subsequently discovers barrels of hazardous material underground,  Business A is responsible to clean up the material. If Business A hires a Company C to clean it up and Company C dumps the barrels in the lake and disappears, Business A is exposed to criminal prosecution. Again, the best solution is to diligently research all companies the business engages.

Be Truthful About Finances

In times of recession, small businesses are hit hard by cash-flow problems—money is coming in, but clients have delayed payment because of their own financial issues. This leads small businesses to seek loans and when presenting the financial picture of the business, to stretch the truth about their finances to a point that reaches fraudulent representation. Simply put—this is a crime known as cooking the books. When making representations about a business, be careful not to stretch the truth.

As long as there is money to be made, there will always be the temptation to earn it the easy way. These are only a sampling of strategies on how to protect a business from white-collar crime. To learn more about the topic, visit the FBI website.