The term ‘a white-collar crime’ was first used by the criminologist Edwin Sutherland in 1939 for various non-violent crimes, usually committed in commercial areas for financial gain. The most common white-collar crimes include computer and the Internet fraud, credit card fraud, fraudulent bankruptcy, fraud in health care, environmental crime, insurance fraud, tax evasion, financial fraud, corruption, bribery, money laundering, and theft of the trade secret. One scam is able to destroy a big corporation or small company, or devastate a family by destroying all their savings. In addition, such a fraud can cost shareholders and investors millions of dollars, as in the case of Enron (Coleman, 2005).
The U.S. President George W. Bush officially signed the anticorruption practices law that was adopted by the Congress in July 2002 to combat corporate fraud. In his speech, he likened such fraud with the terrorist attack of September 11, 2001 and promised that neither one nor the other will be able to undermine the U.S. economy in the future. The new legislation stipulates the better control by the state and the shareholders against companies, their officials, and auditors. In particular, the law requires the establishment of a new oversight body for audit activities at the SEC. Earlier, accounting firms in the U.S. used to be mostly self-regulated. Today, the law also requires companies to establish independent audit committees that have to hire professionals for auditing the accounts of the company. Previously, this duty was done by the company management. The law requires that the company management attest accounts personally. The law makes prosecution procedures of shareholders leaders of their companies and their auditors easier. Prison terms for the frauds heads increased four times as many – up to 20-25 years. In all likelihood, a huge scandal with Enron prompted the senior U.S. political leadership to take such serious actions (Sterling, 2002).
The twenty-first century was marked with the collapse of the U.S. energy giant Enron. The Enron corporation came into existence by way of merger of the two gas companies in Texas and Nebraska in 1985. It became the first company with a network of all-American gas pipelines. Initially, the company specialized only in gas. However, eventually it also engaged in electricity. The company gradually shifted its activities in the area of trade. The corporation had mastered the market of energy futures contracts and derivative securities successfully. Subsequently, it gave the company considerable financial flexibility. Enron soon became the largest trader in the electricity market. The company had 22 thousand employees in 40 countries all over the world. At that time, the U.S. energy industry was freed from excessive state control. Therefore, having the dominant position on the market, Enron was able to manipulate the prices for electricity in the whole country (Friedrichs, 2009).
As a corporation of the national scale, it could not stay away from politics. It had extensive political connections, especially in the Republican Party. Suffice it to say that the president of Enron, Kenneth Lay, was considered a close friend of George W. Bush. In fact, the corporation was the number one sponsor of the U.S. President during his political career in general, and the election campaign in particular. Monetary contributions were generously distributed to campaign needs of various political figures, both Republicans and Democrats., According to experts, in the period of 1989-2001, about 6 million dollars were allocated for these purposes. Only for the needs of George W. Bush, even during his governorship, the corporation donated more than 600 thousand dollars. Other 300 thousand dollars were donated for the inauguration. Many high-ranking officials of the U.S. President were appointed to leadership positions in Enron. It is not surprising that the company received an unprecedented share in the public supply of electricity and great tax benefits. In addition, the company had the last word in choosing people responsible for the regulation of the energy market (those who were in charge of monitoring the corporation) (Sterling, 2002).
The fraud of the company was detected in its accounting operations. The company management developed and implemented an elaborate scheme to hide certain data not only from the public but also from shareholders and investors. This was done in order to distort the true financial position of the corporation. Not one, but thousands of legal persons, mostly offshore companies and partnerships were created. All of these offshore companies were perfectly legal, with the supply of relevant reports to the tax authorities of the United States. In addition, the offshore activities of Enron were approved by its board of directors, attorneys, and outside auditors – Arthur Andersen (Friedrichs, 2009).
Although the devised scheme was extremely difficult, in fact, it was pretty simple. On the one hand, deals with electricity conducted through subsidiaries were allowed to “blow up” costs and, accordingly, - the selling price of electricity. On the other hand, corporate debts, which the company did not want to advertise, were made up on the off-shore companies. It should be mentioned that the American law is quite strict concerning any offshore operations. Under existing legislation on the so-called controlled foreign corporations, the forced inclusion of revenues of the offshore companies in the taxable income of their American owners is provided. Therefore, in the U.S., it is impossible to clear profits in the offshore for the purpose of the tax evasion and stay within the bounds of the law (at least formally). However, fraudsters from Enron did not need it. Not profit, but losses were dropped in offshore. It was possible to improve the financial performance of the corporation; therefore, stocks went up in price. Corporation captured more market share. This allowed its managers and employees receive multimillion bonuses. Naturally, the price of stocks in the company grew. At the same time, some workers had time and opportunity to make a profit from trading activities of the offshore companies, through which financial flows went. Thus, the CFO of Enron, Andrew Fastow, who developed this great scheme, received from one of the activities of the offshore more than $30 million. His assistant, Michael Kopper, received $10 million. Thus, a conflict of interest between the corporation and its employees appeared (Sterling, 2002).
People thought that such a powerful and break-even corporation paid high taxes; however, it was not true. Tax profit and profit for tax purposes are completely different things. They were fantastically different in Enron. Data that appeared to shareholders and tax authorities differed sharply. All debts and expenses were granted in full to the tax authorities. As a result, for the tax authorities, the corporation was completely unprofitable. Therefore, Enron did not pay the income tax at all. Moreover, it received large tax refunds from the U. S. Treasury. However, debts continued to grow, accumulating like a snowball. In 2001, senior management began to dump their stocks secretly. By October, it had become impossible to hide the debts. The company announced a loss of $640 million and a reduction of capital by $1.2 billion. The chief accountant was accused of this situation; he was immediately fired for offshore scams. Stocks of Enron began to plummet. In November, the company reduced the reported profit for 5 years by $586 million. The debts of the company grew even more. In December 2001, Enron applied for bankruptcy. It was the largest bankruptcy in the U.S. history. About 4 thousand people in the U.S. and thousands in Europe were fired. (Sterling, 2002).
One of the world leaders in this field, not only participated in the development of the scheme but also, in anticipation of the collapse, destroyed a large amount of valuable information related to the company. Lenders put forward a number of requirements to both the bankrupt and the bankers of Enron. In addition, major U.S. banks were among the defendants. They were prosecuted for help in misleading the company’s investors. The scandal spread to Europe. In England, Enron sponsored the winning Labor Party, which was accused of building the energy policy in favor of the company. What happened with the giant caused a chain reaction in the U.S. economy. A similar practice was used by hundreds of other companies, which revised its financial results. Some members of the President Administration found themselves in the unfortunate situation. It turned out that the Vice President Dick Cheney and his advisers had met with the leadership of Enron for six times in 2001. The last such meeting was held less than a month before the declaration of bankruptcy. The U.S. Attorney, John Ashcroft, refused from conducting the investigation of the Enron case. According to the information published in the media during the elections to the Senate, he received 60 thousand dollars from Enron for this decision. Even George W. Bush was forced to issue a public statement denying the fact that the Administration was aware of the financial difficulties and the impending bankruptcy of Enron (Sterling, 2002).
American society, and, above all, the business elite and politicians seriously thought about the relationship between business and government, the role of commercial companies in the financing of election campaigns, the impact of energy companies on the country's politics, the conflict of interest while providing consulting and auditing services. The government took a number of bills to strengthen the control of the state over the economy and ensure greater control by shareholders and officers. A prison sentence for fraud managers was also increased. Even foreign companies became a subject to those rules. All this irritated even the America's closest allies, such as Germany. Foreign businessmen are dissatisfied with the U.S. intervention in the affairs of their companies. These unilateral actions on the part of the American Themis are characterized as “economic imperialism” (Sterling, 2002).
However, the main thing is that bankruptcy of Enron revealed serious problems in the U.S. system of financial reporting of public companies. All public corporations build their statements on the basis of this system, as well as its European counterpart – IAS (International Accounting Standards). Today the efficiency of the system, designed to provide reliable information to investors, creditors and business partners, is a big question. It is safe to assume that the standards of disclosure, particularly in the off-balance sheet transactions and operations management will be also strengthened in other countries (Friedrichs, 2009).
I chose this topic because I was very interested in Enron Company and its actions. Following the example of the scandal, we can determine what white-collar criminal is and what role the state might have in this crime. It is now the non-existent U.S. energy company, which completed its work as a result of bankruptcy in 2001. The bankruptcy of the company, which occurred as a result of a major scandal, became one of the largest in history. The main accusations against Enron, was falsifying statements to mislead investors. It is a good example of white-collar crime, when officials who have high socio-economic status (“kings of big business” and “captains of industry”) commit acts that lead to violations of the laws designed to regulate their professional activities. Unfortunately these crimes often lead to big troubles and tragedies. In particular, it can lead to suicide, as in the case of Enron scandal, when during the erupted scandal Vice President Clifford Baxter committed suicide. This research helped me understand what white-collar crime is and what dreadful consequences it can have. The part when I got to know that even the most influential and powerful people of the country were involved in the scandal stood out the most to me. This scandal acquired the world-wide scale. To my mind, in future due to Enron Company there will be no scandals of such level, as it had an influence on the economy of many countries.