Corporate fraud and other white collar crimes aren’t from Mars

Elizabeth Holmes founded Theranos - a blood-testing technology company - in 2003, when she was 19. On January 3, 2022, she was found guilty on four charges of fraud. (Illustration: Moneycontrol)

Recent allegations of fraud in celebrated Indian startups, coming on the heels of the conviction of Theranos founder Elizabeth Holmes in the US, prove that pedigree is no bar to white-collar crime.

Just as the best of companies have been caught cooking their books, the most credentialed of men and women have been discovered with a hand in the till or even worse.

The recent conviction of an ex-McKinsey partner Puneet Dikshit for securities fraud, shows that no company can consider itself insulated from the future actions of its employees.

Top companies like McKinsey try hard to foster a culture of honesty and integrity. Mostly they succeed. Yet the fact is both the institutions and the people are fallible.

For decades, US banks and financial institutions swore by ethical behaviour and had elaborate and very public codes of conduct in place. Yet, in 2008 when the financial crisis broke, they were found to have been systematically manipulating customers for their own gains.

And since none of them paid the price for their misdemeanors, you can bet your last dollar that very little has changed inside these gargantuan institutions, now conveniently dubbed too big to fail.

Also read: Conviction of Elizabeth Holmes is an indictment of a startup culture that rewards deceit

Sadly, many criminals seem to have been working away on their future plans and indeed used their stints within these companies to further their evil designs. Ruja Ignatova,  the missing mastermind behind the $6 billion fake cryptocurrency scam, used her ex-McKinsey tag to grab prestigious speaking slots at global conferences. Ignatova is no slouch in terms of educational qualifications either - she has a doctorate in European private law from the University of Constance.

In India, too, the multi-million dollar scams at institutions like ILFS, Yes Bank and ICICI Bank were engineered by those from elite educational institutions. The disgraced ex-chairman of ILFS, Ravi Parthasarathy, is an alumnus of the Indian Institute of Management - Ahmedabad, while Yes Bank founder and destroyer Rana Kapoor graduated from Shri Ram College of Commerce, Delhi University, and then did his MBA from Rutgers University in the US.

Also read: Yes Bank's Rana Kapoor: How intelligence, impatience and greed made for corporate tyranny

Many of the infamous business leaders in the US graduated from Ivy League schools. Jeffrey Skilling, the former CEO of Enron who spent 12 years in jail for his role in the scam, was an alumnus of Harvard Business School.

Clearly, which educational institution a person attended or what company she worked for is no guide to how honest she will turn out to be. So, is there something different about the mind of the potential white collar criminal, something tangible that can be filtered at the outset?

In 1968, University of Chicago economist Gary Becker, who won the Nobel Prize for Economics in 1992, examined the nature of white-collar criminals. In a paper titled “Crime and Punishment: An Economic Approach,” he examined criminals as rational individuals, and concluded that like ordinary people, they too seek to maximize their own well-being. The difference is that they do so using means which we consider illegal.

Becker shocked people by advocating stringent fines rather than prison sentences as punishment for all but the most heinous of crimes. His rationale, which he explained to The Chicago Maroon, was that “fining has a great advantage. If you’re a criminal and you pay me (as the government) a fine, then I’m getting compensated. On the other hand, say I send you to prison; then you’re giving up something, but I’m also giving up something since I have to have guards and money and so on to take care of you. So that’s a really bad form of punishment."

Viewed from the perspective of an economic activity governed by its own dynamic of demand and supply, white-collar crime doesn’t appear to be such an unusual thing. If we believe that it has become more common and prevalent, it may also be because many more companies today function on the borderline of ethics and downright criminal behaviour. In such an environment, it is possible to see that the top companies engineer an internal culture of aggressive behaviour and cut-throat competition which in turn nurtures such people.

From this vast pool of hundreds of machismo-spewing supermen, it isn’t unlikely that a few don’t know when or where to stop.

Also read: Startup Street | Beware! Fraud by entrepreneurs is a recurring phenomenon