Who's Soft on White Collar Crime!

By Cydney Posner

Keeping with this week's leitmotif of the psychological underpinnings of unethical or illegal behavior, following is a link to a Reuters article regarding the use by the SEC and other regulators of FBI profilers to help identify white collar criminals.  These profiling strategies reflect "an aggressive new approach" that developed partly in reaction to "widespread criticism over the lack of criminal cases stemming from the financial crisis." (See, for example, this recent piece by Gretchen Morgensen and Louise Story in The New York Times).

For the past two years, agents with the FBI's Behavioral Analysis Unit have been working with securities fraud detection teams, reviewing case files for Bernard Madoff and other convicted financial criminals: "The hope is the BAU agents, whose work in profiling serial killers has been popularized in books, movies and on TV, can get into the minds of fraudsters and see what makes them tick." The FBI has actually "embedded" one of its agents with the SEC's market intelligence unit. The profilers "believe they can develop profiling strategies that will help undercover agents ferret out corrupt corporate titans, shady hedge fund traders and other Wall Street con artists. At a minimum, the profilers want to determine if major white collar criminals share enough personality traits and behavioral patterns that agents in interrogations and investigations could use the information they glean." The article reports that "some of the FBI agents in New York assigned to investigating securities fraud openly describe some of their targets as operating like ‘professional criminals' - the kind of language you might expect agents to use when discussing the Mob or other organized crime syndicates."

However, the authors note that many prosecutors, criminologists and investigators interviewed were skeptical that these techniques would be effective in this context. One former prosecutor characterized it as "voodoo law enforcement," arguing instead (consistent with the NYT op-ed of earlier this week) that "few white collar offenders set out to be criminals. In most cases, they end up breaking the law because they keep stretching the limits of permissible activity. ‘You could give these people lie detector tests and they might pass.' " A criminology professor stated that her research showed that many white collar offenders were "extremely controlling in the workplace, almost obsessively so. But she said the problem profilers may encounter is that the characteristics that make a successful businessman, especially on Wall Street, are often ones shared by white collar offenders."

Others, who support profiling, contend that greed is often secondary to pride, stature or loyalty as motivation for many white collar offenders. Although profilers themselves acknowledge that they can't replace accountants when it comes to white collar crime, in "FBI speak, ‘the pitch' is all about determining which suspect in an investigation is the best one to approach to turn into a cooperator and get them to either wear a wire or tape phone calls with friends and colleagues. The success of an undercover investigation often rests on finding the right person to ‘pitch' or ‘flip,' " something the profilers can be helpful with.

The SEC is already using something like profiling in work by its relatively new insider trading team, which "has developed an expertise in analyzing associations between traders suspected of wrongdoing and their friends and relatives.

"Relying on computers to analyze trades made by people with common social connections, the team will also look for aberrant trades that fall outside the expected pattern of activity. They have found that these one-off trades can lead to people who may prove to be weak links and potential cooperators. [Remember the one-off personal trades by the middleman in the recent law firm insider trading case that helped investigators uncover the ring.) 

"This so-called pattern-recognition analysis may not be profiling in the classic sense. The SEC isn't focusing on behavioral characteristics of suspects as the FBI agents do. But regulators are profiling data to help find patterns in trading activity that previously would have left regulators befuddled and scratching their heads."

However, the authors suggest, while pattern recognition has achieved some early success, it "lends itself best to smoking out insider trading rings, not to busting a corporate executive cooking the books or a person running an investment scam." ]

The authors report that "one of the most important behavioral tools that FBI profilers bring to the white collar world is a perspective of focusing on the victims to learn more about the offender." For example, victims of financial frauds often ignore obvious warning signs because they are "blinded by promises of big returns." According to one former prosecutor, " ‘Investors tend to be greedy and ignore red flags if they are making money and that is something that occurs with boiler rooms, insider trading and Ponzi schemes….The bad guys know all this and they play off it.' "