S p e c i a l N e e d s O f f e n d e r s

a publication of the Federal Judicial Center BULLETIN

INSIDE What it is, Who Commits It . . . . . . . . . . . 3

Investigation and Supervision Issues . . . . . 5

Questions for Self-employed Defendants

and Offenders . . . . . . . . . . . . . . . . . 6

Interviewing Techniques . . . . . . . . . . . 8

Badges of Fraud . . . . . . . . . . . . . . . . 10

Supervision Techniques . . . . . . . . . . . . 12

Resources for Technical Assistance . . . . . 16

No. 6

February

2001

According to the U.S. Sentencing

 Commission, embezzlement, forgery/counterfeiting, bribery, money

laundering, tax offenses and other fraud

and nonfraud white collar crimes accounted for almost 20% of cases sentenced under U.S. Sentencing Guidelines in fiscal 1999. The Commission

received information on 255 organizations sentenced under the guidelines

that same year.

White-collar crimes pose unique

challenges to the federal judiciary.

How do the courts distinguish between

“situational” and “career” white-collar

defendants and offenders? How do probation officers develop strategies for

collecting monetary penalties? How do

both probation and pretrial services

officers determine a defendant’s or

offender’s financial status and formulate appropriate special conditions?

How do officers supervise white-collar

defendants and offenders?

Particularly daunting are complex

economic crimes involving multiple

defendants, multiple victims, intricate

transaction records, and high economic

stakes. Several of these complex whitecollar crimes have gained attention in

the past decade.

Power on probation

In 1989 a steam pipe exploded in Manhattan killing three people and spewing 200 pounds of asbestos over a wide

area. ConEd, the utility company responsible for the pipe, denied that asbestos had been released during the

explosion.

by

Mark Sherman

PhotoDisc

White-collar

Crime
Special Needs Offenders Bulletin ◆ February 2001 ◆ White-collar Offenders 2

and sentenced to two years in

prison. Michael Andreas (vice

chairman of the board and executive vice president of sales

and marketing) and Terrence

Wilson (president of the ADM

corn-processing division) were

found guilty of conspiring to

violate section 1 of the

Sherman Antitrust Act, barring conspiracy or combination

to restrain trade.

A panel of the U.S. Court of

Appeals for the Seventh Circuit held that the sentencing

judge should have enhanced

the prison terms. The court indicated that USSG §3B1.1

calls for an enhanced sentence

for the leader or organizer of a

criminal activity that involved

at least five participants.

Parole payback

In 1998 Henry Gherman was

released on parole in the Southern District of Florida after serving almost 10 years in federal

prison. Gherman was incarcerated after pleading guilty to

seven felony counts, including

mail fraud and embezzlement

from employee pension funds.

Beginning in 1982, Gherman, founder of First Financial

Planning Inc., a financial services company for doctors, embarked on a scheme to defraud

investors out of approximately

$10 million in pension and

other funds. Gherman’s clients

believed their funds had been

placed in certificates of deposit.

In truth all of the money was

deposited in First Financial’s

accounts and converted by

Gherman for his own use. First

Financial had maintained 183

brokerage accounts and 120

bank accounts.

Gherman’s sentence included an order to make restitution of $12,903,250, pursuant

to his pending bankruptcy proceedings.

Island fun(d)s—and fines

In 1987 Cecil H. Butcher Jr.

pleaded guilty in the Eastern

District of Tennessee to conspiracy, bankruptcy fraud, misapplication of bank loan funds,

tax fraud, and money laundering.

Butcher had built a $1.5 billion, 22-bank empire across east

Tennessee and Kentucky. His

older brother Jake, a co-defendant, earlier had been convicted of bank and tax fraud in

the failure of his United American Bank, at the time the third

worst bank failure since the

Great Depression.

To conceal assets and defraud

bankruptcy creditors, Cecil set

up accounts and businesses on

Grand Cayman and Grand

Turk in the British West Indies

(both offshore banking havens), where assets were transferred and laundered before being brought back into the

United States. At one bank on

Grand Cayman, he transferred

$1.65 million from a trust account at a Miami bank to the

account of United Southern

Ltd., a shell corporation.

Sentenced to 20 years, and

fined over $300,000, Cecil was

released on parole in the

Northern District of Georgia in

the early 1990s. The probation

office, working closely with the

U.S. attorney’s financial litigation unit, conducted a financial

audit of Butcher’s assets, resulting in a lump sum fine payment

exceeding $300,000.

In November 1994 ConEd

pleaded guilty to conspiracy,

failure to notify authorities of

the asbestos threat, making

false and fraudulent statements,

and deceiving the Environmental Protection Agency and

the National Recovery Center.

Former ConEd executive Constantine Papakrasas pleaded

guilty to failure to report the

asbestos release to a federal

agency.

In April 1995 Federal Judge

John Martin sentenced ConEd

to three years of probation under the supervision of a courtappointed monitor and fined

the company $2 million. In

1998 Judge Martin approved an

agreement requiring ConEd to

continue environmental compliance programs, support of a

telephone hotline for confidential complaints, and periodic

reporting to the government on

compliance. The former executive had faced a maximum of

three years in prison. Judge

Martin, after learning of

Paprakasas’s failing health, ordered him to pay a $5,000 fine.

Price of conspiracy

In 1996 Archer Daniels Midland Corp. (ADM), one of the

largest food- and farm-ingredient producers in the world,

pleaded guilty in the Northern

District of Illinois to two felony

counts of price-fixing and was

ordered to pay a $100 million

fine. Although the fine was almost seven times larger than

any previous antitrust fine, it

amounted to only 14% of ADM

profits in 1996 and less than 1%

of its $13.3 billion in cash.

Two company executives

were convicted of price-fixing
WHITE-COLLAR

CRIME: WHAT IT IS,

WHO COMMITS IT

The term “white-collar crime”

was coined in 1939 by criminologist Edwin Sutherland,

who defined it as “crime in the

upper, white collar class, which

is composed of respectable, or

at least respected, business, and

professional men.”

To many, white-collar crime

is defined by the nature of the

offense. According to the FBI,

white-collar crime consists of

those illegal acts which are

characterized by fraud,

concealment, or a violation of trust and which are

not dependent upon the

application of force or

threat of physical force or

violence. These acts are

committed by individuals,

at all levels of the economic spectrum, and organizations to obtain money,

property, or services; to

avoid the payment or loss

of money or services; or to

secure a personal, political, or business advantage.

One study categorizes whitecollar offenses by their complexity, based on pattern, use of

organizational resources, number of conspirators, and length

of perpetration. Antitrust and

securities fraud are in the

“high” complexity category;

mail fraud, false claims, and

bribery in the “moderate” category; and tax fraud, credit

fraud, and bank embezzlement

in the “low” category.

Perpetrators range from situational to career offenders.

Situational offenders have

relatively benign motives. They

need to pay bills, maintain a

certain lifestyle, or support a

substance abuse problem, or

they want to get back at an employer. They have jobs that offer opportunities for unlawful

transactions, and their crimes

are relatively unsophisticated.

Career offenders are swindlers—their “job” is engaging

in unlawful business transactions. Studies indicate that the

bulk of the white-collar

caseload in the federal judiciary

is composed of situational offenders and those who fall

somewhere between the two

ends of the situational-career

continuum. The more sophisticated defendants and offenders affect the system disproportionately, however, because of

the degree of harm they inflict

and the staff time required to

investigate and supervise them.

Organizational perpetrators

of white-collar crime can be

classified much like individuals.

Corporate criminal liability

stems from the tort law doctrine

which generally holds an employer liable for acts committed by employees within the

scope of their employment.

Over the years, courts have expanded corporate criminal liability to situations where employees act contrary to express

corporate policy, where a number of agents or employees acting together satisfy all the elePhony clean-up

In 1993 in the Central District

of California, Barry Minkow

was released on parole after

serving one-third of his 25-year

sentence for fraud. Minkow was

the founder of ZZZZ Best carpet cleaning.

A publicly traded company,

ZZZZ Best was worth over $300

million in 1987. Just before the

company’s planned merger with

another company twice its size,

a newspaper article appeared

indicating that ZZZZ Best was

a fraud. The merger was cancelled, and a criminal investigation confirmed the fraudulent nature of ZZZZ Best.

Minkow had built the company through a combination of

check kiting, loan fraud, bribery, and fictitious record keeping that duped shareholders,

accountants, and investment

bankers. He created phony

documents including loan files,

check registers, general journals, and accounts receivables

invoices.

In addition to his prison sentence, Minkow was ordered to

pay $26 million in restitution.

Since his release from prison,

Minkow has been making

money by speaking to various

groups – including bank executives and the FBI – about his

scheme and how it could have

been prevented.

Two levels of behavior

As the cases cited above well illustrate, white-collar crime often

involves investigation, sentencing, and supervision not just of

individuals but of organizations

and requires officers to understand corporate behavior as

well as human behavior.
ments of an offense (“collective

knowledge”), where a corporation fails to investigate facts

that point to criminal conduct

(“willful blindness”), or, in the

case of public health and safety,

where the organization commits criminal acts but had no

specific criminal intent to do

so. Thus, some corporations

can be thought of as situational

offenders.

Likewise, some organizations

are “career offenders” in that

they exist to facilitate criminal activity. The commentary

to USSG §8C1.1 defines

“criminal purpose organizations” as those that, for example, serve as “a front for a

scheme that was designed to

commit fraud; an organization

established to participate in the

illegal manufacture, importation, or distribution of a controlled substance . . . [or] a hazardous waste disposal business

that had no legitimate means

of disposing of hazardous

waste.” Such organizations can

either act alone or be connected to larger criminal organizations.

The FBI emphasizes the importance of corporate organization in white-collar crime. Indeed, studies have shown (and

the probation and pretrial services officers interviewed for

this bulletin agree) that “[t]he

most consequential white collar crimes—in terms of their

scope, impact and cost in dollars—appear to require for their

commission that the perpetrators operate in an environment

that provides access to both

money and the organizations

through which money moves.

The status or prestige of the orSituational Offenders

➪ do not have a significant

criminal record, pending

criminal charges, or an

instant offense involving

a controlled substance

➪ do not have a history of

mental illness, significant emotional instability, or violent behavior

➪ do not engage in patterns

of criminal conduct,

maintain gang affiliation,

or have a history of criminal association

➪ often are ashamed of

their actions

➪ often have money problems or a history of substance abuse

Career Offenders

➪ are good salespeople—articulate, seemingly wellinformed, believable, and

continually pitching the

“deal”

➪ are good storytellers and

conversationalists who

seek to engender confidence

➪ know how to psychologically manipulate others

➪ create the impression of

authority and leadership

➪ vent anger and frustration

under a generally cool

and controlled exterior

➪ are often friendly and

charming

➪ can easily adapt to different social situations to

“blend in”

➪ become obsessed with the

scam they are executing,

often fudging figures on

financial statements, falsifying corporate credentials, and fabricating strategic plans

➪ often enjoy taking risks

and living on the edge

➪ often enjoy a lavish

lifestyle that gives them a

sense of importance

➪ feel no remorse or guilt

As always, officers should avoid generalizing about defendants

and offenders and evaluate each case on its own merits. Officers should be aware of the characteristics common to the two

main white-collar offender categories, however.

ganization, or the individual

who inhabits it, is only an incidental feature, for the key factor is location in the organization where money is to be

found.” The degree of harm inflicted by either type of offender

usually depends on the organization and the individual’s position within it. ◆

Characteristics of

Individual Offenders
5 Special Needs Offenders Bulletin ◆ February 2001 ◆ White-collar Offenders

ISSUES AND TOOLS FOR

INVESTIGATION AND

SUPERVISION

and assistant U.S. attorney

early in order to understand

the defendant’s actions underlying the indictment

• using proprietary databases

such as ChoicePoint and

Lexis/Nexis to access information on the defendant’s

real estate holdings, credit

history, assets, liens, child

support and other court orders, etc.

• asking a defendant about

employment, keeping in

mind the relationship between an individual’s job and

his or her opportunity to

commit a crime

• asking a self-employed defendant about his or her business, being aware of indications that a business is being

used to conduct unlawful activity (see box, p. 6)

Presentence investigation

By the time a case reaches the

presentence stage, the type of

white-collar offender the court

is dealing with should be apparent. However, presentence investigators can go much further

than pretrial services officers in

obtaining and piecing together

personal and financial information, enabling them to provide

a synopsis of the offender type

and an overview of the offender’s finances that will help the

court during sentencing.

Investigation and supervision

of white-collar defendants and

offenders must begin with the

AO’s Criminal Monetary Penalties: A Guide to the Probation

Officer’s Role (Monograph 114)

and the Center’s Financial Investigation Desk Reference for

Probation and Pretrial Services

Officers. The tools described in

this bulletin merely supplement

those two essential resources.

Pretrial investigation

Identification of white-collar

defendant type is perhaps the

single most important aspect of

the pretrial services officer’s job.

As with any defendant, identification helps the officer determine dangerousness and risk of

nonappearance and formulate

recommendations for special

bond conditions.

Certain aspects of investigation of white-collar defendants

can complicate these tasks. To

begin with, defendants often

have left convoluted paper

trails and officers often have

only a short time to interview

and investigate before the initial appearance. Consequently,

verification can be difficult. In

addition, the pretrial services

officer is not permitted to ask

the defendant about the circumstances of the alleged offense.

For these reasons, officers

should keep in mind that, in

cases where facts indicate that

a defendant may have difficulty

complying with release conditions or where other supervision issues are present, investigation need not stop with the

initial appearance and release

decision. Rather, the officer

should continue investigating.

If any “red flags” pointing toward a heightened risk of danger or nonappearance are discovered, the officer should consider asking the court to add or

modify special bond conditions.

Specific investigative techniques and tools that may assist the officer in identifying the

defendant as “situational” or

“career” prior to initial appearance include

• looking beyond certain behavioral characteristics

while keeping others in

mind. The officer must remember that white-collar

defendants of all types often

have common characteristics, such as high education

levels, quality legal representation, knowledge of business

and finance, values similar to

those who enforce the law,

and high social status evidenced through wealth, occupation, community standing, or personal and business

connections. (See box, opposite.)

• contacting the case agent
Special Needs Offenders Bulletin ◆ February 2001 ◆ White-collar Offenders 6

“Top 11” Potential Questions for Self-employed*

Defendants and Offenders

1. Who are the officers, shareholders, and members of the board of directors of

the organization, and how many shares are held by each?

2. What products or services does the organization sell?

3. Where are the assets of the organization located (e.g., offices, warehouses, equipment, inventory, etc.)?

4. What type of records does the organization keep, and who is responsible for

them?

5. What is the method of accounting: cash or accrual? What is the basis for accounting: calendar or fiscal?

6. Has the organization ever been audited by a certified public accountant? If so,

who was the accountant?

7. How is the account organized? What is the line of responsibility, and what are

the duties of the accounting/bookkeeping personnel?

8. Has the organization ever received property other than money for compensation? If so, please describe.

9. Were any funds borrowed? If so, how much, when, and from whom? From a

financial institution, stockholders, a person, or an entity? What is the repayment agreement?

10. What kind of bank accounts does the organization have, and where are they?

11. What is a typical business transaction like? (Note: Flow-chart the procedure

for future reference from inception to completion, including all paperwork generated.)

* Currently self-employed or seeking to become self-employed while under supervision. The original list

consists of 63 questions. For more information, contact the District of New Hampshire Probation Office

at (603) 225-1515.

Assuming defense counsel

will permit the offender to discuss the case and answer questions, the officer should have

the offender map out a flow

chart showing how he or she

makes money—especially if the

offender is self employed. The

offender should “walk through”

a typical business transaction

from start to finish with the officer and explain the types of

books and records kept for his

or her business. The offender

should agree to provide access

to all business records. By forcing the offender to document

these issues, the officer will

make it difficult for the individual to explain any diversions

from those practices should the

officer uncover irregular practices down the road. In addition, when the offender floods

the officer with financial and

business documentation, the

officer will be better able to understand it.

The presentence investigator should consult pretrial services reports and contact the

case agent and assistant U.S. attorney to obtain supplemental

information. Uncovering assets

and victims becomes more difficult with time. The trail of assets is warmest at the pretrial

stage, when a defendant wants

to convince the court that he

or she has sufficient assets to

post bond. By the presentence

stage the offender is looking to

reduce his or her financial

standing in order to limit liability for fines and restitution. To

do this, offenders often will

hide assets by transferring them

out of their legal control but

within their operational control (i.e., to a relative, business

associate, corporate shell, etc.).

On the other hand, the offender will not want to be

viewed as uncooperative in providing financial information.

In addition to using the tools

available at the pretrial stage,

presentence investigators

should have the offender sign

releases that permit the officer

to obtain access to bank and

brokerage accounts and to tax

information from the offender’s

certified public accountants

and from the Internal Revenue

Service. Transcripts of Account

from the IRS can provide information on the offender for

the previous five years. This information can be used to verify

the offender’s employment, income, and property ownership

history.
7 Special Needs Offenders Bulletin ◆ February 2001 ◆ White-collar Offenders

Investigation/Supervision Checklist*

* This checklist is intended to supplement, not to replace, information provided by Monograph 114.

✔ Has the offender provided detailed

information on all personal and business checking or savings accounts?

✔ Does the officer have the information necessary on all accounts over

which the offender has signatory authority?

✔ Does the offender have a safe deposit

box? If so, what are the contents?

✔ Does the offender maintain canceled

checks and bank statements?

✔ Is the offender an officer of, or does

he or she own stock or have any interest in, any corporation or partnership?

✔ Is the offender a grantor, grantee,

trustor, trustee, or beneficiary of any

trust? (Obtain consent for access to

records.)

✔ Does the officer have a complete

description of bookkeeping, records,

or documentation of the offender’s

business?

✔ Who maintains the books of the

offender’s business?

✔ To what degree is the offender responsible, if at all, for maintaining

or reviewing business records?

✔ Where are the business records located?

✔ Has the offender executed appropriate release forms?

✔ What is the date of the offender’s

last Net Worth and Cash Flow statements?

✔ Has the officer instructed the offender to provide copies of federal

and state income tax returns, including all schedules and attachments?

✔ Does the offender hold a professional license? If so, what is the status of that license?

✔ Has the offender been the subject

of civil or regulatory actions? If so,

what is the nature of those actions

and what is their status?

✔ What are the current, identified

supervision issues?

✔ Are there any third-party risk issues?

Has the officer received confirmation of notification? (supervision

only)

✔ Do special conditions require modification? (supervision only)

✔ Are special instructions needed?

IRS Documents for Basic Investigation of

Individuals and Organizations

$ Form 1040 U.S. Individual Income Tax Return with

Schedules A-E and SE

$ Form 1120, 1120S U.S. Corporate Income Tax Return

$ Form 1065 (Schedule K-1) Partner’s Share of Income,

Credits, Deductions, etc.

$ Form 2441 Child and Dependent Care Expenses

$ Form 4797 Sales of Business Property

$ Form 4562 Depreciation and Amortization

$ Form W-2 Wages, Salary, Tips

$ Form 1099 Other Income

The officer should obtain

transcripts of all relevant IRS

forms. For publicly held corporations, the officer should obtain documents filed with the

U.S. Securities and Exchange

Commission and state-based

depositories of corporate information (i.e., the state secretary

of state’s office). The Social

Security Administration can

confirm an offender’s name,

address of employer, and salary.

The probation office may wish

to seek a court order under the

All Writs Act, 28 U.S.C. §1651,

to obtain financial documents

from third parties.

The officer should also take

advantage of services offered by

state or national professional or

trade associations such as the

Association of Certified Fraud

Examiners and the National

Association for Bank Security.

Finally, the officer should obtain background information

on the offender by inquiring

with federal regulatory agencies

such as the Federal Reserve and

Federal Deposit Insurance Corporation if the offender is a

bank, the U.S. Secret Service’s

Financial Crimes Division if

the offender was convicted of

counterfeiting or credit card

fraud, and the Federal Trade

Commission and Securities and

Exchange Commission, both of

which prosecute civil actions

for fraud and securities violations, and their state-level

counterparts.

Background information on

publicly held corporations can

be obtained from Dun &

Bradstreet Inc. Officers should

also consult federal, state, and

private licensing entities, such

as the National Association of

Securities Dealers if the offender is a broker-dealer or brokerage firm, state bar associations if the offender is a lawyer

or law firm, state institutes of

certified public accountants if

the offender is an accountant

or accounting firm, and state

insurance regulatory agencies if

the offender is an insurance

agent or firm.
Restitution

Payment and collection of restitution are often necessary in

white-collar cases. The restitution responsibilities of a presentence investigator include notifying victims, compiling financial information, writing

victim impact statements, and

preparing accurate judgment

orders.

Although collection is generally dealt with during supervision, any amount collected

prior to or at sentencing would

benefit the victims, the offender, and those responsible

for managing the offender (i.e.,

the court and the supervision

officer). In some cases, the officer may encourage the offender to pay restitution before

sentencing. The officer should

explain that the court may look

favorably upon an offender’s

early payments in deciding issues such as the amount of reduction for acceptance of responsibility under USSG

§3E1.1, where the offender will

be sentenced within the guideline range, and whether a sentence of probation is appropriate (if applicable).

In the District of Iowa, if the

defendant can pay restitution at

the time of sentencing but does

not, the probation office will

not recommend that the court

waive restitution interest. The

probation office advises its officers to remind the offender

that early discharge from probation or supervised release pursuant to 18 U.S.C. §§ 3564(c) and

3583(e)(1) will almost never be

considered if the defendant has

outstanding restitution. The

probation office further advises

Interviewing Techniques for

Investigation and Supervision*

Advise the offender.

Truthful information is required pursuant to conditions of release and 18 U.S.C.

§§1001 and 1503.

Ask general versus specific questions.

Start with general questions, then follow up with specific questions. This technique will enable the officer to determine what the offender knows before the

officer indicates, by the specific questions, what he or she knows and does not

know.

Do’s and Don’ts

* Developed by the District of Oregon Probation Office.

✘ Don’t interrupt the offender when he

or she is answering. Allowing the offender to wander within reasonable

limits may provide useful information.

✘ Don’t ask hostile questions.

✘ Don’t ask compound questions. Make

sure each question requires only one

answer.

✔Do give the offender time to answer

each question.

✔Do understand the offender’s response. Ask for clarification if necessary.

✔Do confront the offender (when appropriate) with the fact that he or she

has lied. Ask why he or she lied, and

study the offender’s reaction to being confronted.

✘ Don’t accept general answers or statements. Use the “who, what, where,

when, how, and why” technique.

✔Do control all aspects of the interview, maintain order, and control the

tempo of questions.

✘ Don’t permit “off-the-record” discussion if the interview is being recorded.

✘ Don’t ask leading questions that require a one-word response. Ask concise questions that are easy to understand and answer.

✔Do increase the degree of firmness if

the offender’s responses indicate a

pattern of evasiveness, but never become sarcastic, belittle the offender,

or show emotion.

✔Do ask the offender if he or she maintains a personal or business checking

or savings account or if he or she has

signatory authority over any bank account or safe deposit box. If so, ask

whether the offender maintains canceled checks and bank statements

and what property is contained in the

safe deposit box. Ask the offender if

he or she is the officer of, or owns

stock in, any corporation or partnership. Ask the offender if he or she is

the grantor, trustor, trustee, or beneficiary of any trust.
9 Special Needs Offenders Bulletin ◆ February 2001 ◆ White-collar Offenders

its officers to consider impressing on the offender that early

and complete restitution will

allow the offender to gain more

financial freedom due to decreased pressure from the probation office.

Finally, in rare instances,

courts have departed below the

guideline range based on extraordinary payment of restitution pursuant to United States

v. Garlich, 951 F.2d 161 (8th Cir.

1991). The district advises its

officers not to promise or agree

to recommend any such departure, however.

The officer should formulate

special conditions that facilitate control of the offender’s financial and employment situation. In the pretrial services context, recommended special conditions must be justified, as with

any defendant, in terms of how

they reduce the risk of danger,

the risk of nonappearance, or

both, and they must be the least

restrictive. In the probation

context they must be enforceable, reduce the risk of danger

to the community, and contribute to correctional treatment.

Potential special

conditions

The presentence investigator

can recommend a number of

special conditions, depending

on the issues presented by the

offender. These special conditions include searching the offender and his or her belongings (where less invasive alternatives would be ineffective),

restricting employment, restricting travel, prohibiting the

offender from opening new

credit lines, disclosing finances,

paying an IRS debt, and prohibiting the offender from visiting specific places or associating with certain individuals.

 The District of Oregon Probation Office recommends the

following special conditions for

white-collar offenders where

restitution or a fine is being recommended:

• The offender shall authorize

release to the U.S. probation

officer of any and all financial information by execution of a release of financial

information form, or by any

other appropriate means, as

directed by the probation officer.

• The offender is prohibited

from incurring new credit

charges or opening additional lines of credit without

the approval of the probation

officer.

In cases where an offender represents a financial risk or is selfemployed, the probation office

suggests the following special

conditions:

• The offender shall maintain

a single checking account or

savings account in his or her

name. The offender shall

deposit into this account all

income, monetary gains, or

other pecuniary proceeds,

and make use of this account

for payment of all personal

expenses. All other accounts

must be disclosed to the probation officer.

• The offender shall disclose

all assets and liabilities to the

probation officer.

Probation officers from the

Northern District of Georgia

participated on a committee

composed of representatives

from probation, the U.S.

attorney’s office, and the clerk

of court to develop an efficient

method for collecting monetary

penalties. The result was a

Memorandum of Understanding (MOU) regarding certain

procedures each agency would

use. The judges in the district

reviewed and approved the

MOU, which brought the district into compliance with

Monograph 114.

Another cooperative effort

developed in the district involves the Financial Investigation Team (FIT) chaired by the

A Collaborative Approach for

Collecting Monetary Penalties

district’s Special Offender Specialist. The team consisted initially of presentence and supervision line officers, specialists,

and supervisors. The members

worked together on complex

fraud cases, brainstorming approaches to specific financial

challenges and assisting one another in conducting laborious

tasks such as tracking down assets (e.g., real property

searches). Partially as a result

of the MOU, the probation office recently developed relationships with other agencies to

support the FIT’s efforts. Supporters include the chief assistant U.S. attorney for the

district’s FLU, an IRS agent,

and an FBI agent.
 procrastinating in responding to requests

for financial information

 routinely using cash, cashier’s checks, or

money orders

 filing tax returns late or not at all

 serving as the director or officer of three

or more companies, particularly with

similar names or business purposes (possible money laundering)

 maintaining a lifestyle or purchased goods

clearly exceeding reported income

 consistently reporting monthly expenses

exceeding or equaling reported income

 transferring property with little or no consideration

 transferring the entirety of his or her

assets

 maintaining a close relationship with a

transferor or transferee of assets

 engaging in secret or hurried transactions

 departing from the usual method of doing business

 retaining an ownership benefit from

transferred assets

 using a post office box or mailbox without reporting it, or without a specific

need

 submitting incomplete monthly reports

BADGES OF FRAUD*

* Developed by the District of Oregon Probation Office.

 making excessive toll calls, maintaining

several bank accounts, or engaging in excessive banking activities

 engaging in businesses such as general

business broker or telemarketer, businesses with no identifiable capital source

or an offshore source, or businesses involving questionable partners; maintaining an inactive corporation

 maintaining computers, connected devices, or business telephone/fax numbers

or electronic mail accounts in the home

for no stated or reasonable purpose

 making bank deposits or transactions inconsistent with reported income or pay

schedule

 failing to keep proper books and records,

especially if instructed to do so

 making false, misleading, or inconsistent

statements

 serving as the grantor, trustee, beneficiary,

or administrator of a trust

 working for a business that pays salary or

wages in cash only

 making claims of acting as a “financial

consultant” or similar occupation

 working with or operating a business with

principals, associates, partners, clients, or

customers located offshore or identified

as foreign entities
11 Special Needs Offenders Bulletin ◆ February 2001 ◆ White-collar Offenders

• The offender shall not transfer, sell, give away, or otherwise convey any asset with a

fair market value in excess of

$500.00 without the approval of the probation officer.

• The offender shall not make

application for any loan, enter into any credit arrangement, or enter into any residential or business lease

agreement without approval

of the probation officer.

• The offender shall maintain

proper debit, credit, and receipt ledgers for all business

transactions. These records

shall be made available as

requested by the probation

officer.

Organizations sentenced to

probation under the guidelines

are also subject to special conditions, such as

• publicity paid for by the offender in media specified by

the court detailing the crime,

conviction, sentence, and

remedial steps taken

• development by the offender,

with court approval, of an

effective program to prevent

and detect future law violations

• notification of employees

and shareholders of the offense and of the details of the

compliance program

• periodic reports to the court

regarding progress in implementing the compliance program examinations of facilities and records, and interviews of employees by the

court or a special probation

officer to monitor compliance

The guidelines indicate that

regulatory agencies (e.g., the

Environmental Protection

Agency in cases involving environmental offenses) may be

consulted in developing and

monitoring probation conditions. Further, supervision

might include coordination

with regulatory officials. Additionally, probation violations

may lead to extension of the

probation term, stricter conditions of probation, or revocation and resentencing. In cases

of continued intransigence, the

court may appoint a special

master to ensure compliance

with probation conditions.

Sentencing of

organizations

While many of the same investigative techniques that apply

to individuals also apply to organizations (e.g., documentary

investigation, use of past tax

returns to uncover assets, etc.),

these entities present unique

sentencing challenges. Because

an organization cannot be imprisoned, other sanctions must

be imposed. These often include a term of probation for a

period of one to five years pursuant to the guidelines.

A 1997 study sponsored by

the U.S. Sentencing Commission found that a majority of

271 organizations sentenced

under the guidelines between

1991 and 1996 were closely

held companies with 50 employees or less and that most of

these organizations were also

first-time offenders. (The

USSC’s 1999 figures indicate

that 89 of the 92 organizations

for which data were available

had no prior record.) Probation

and pretrial services officers interviewed for this bulletin report similar trends. Officers indicate that the organizations

they deal with often are mom

and pop operations that have

fixed their books, or tight-knit

companies that refuse to cooperate with officers because company officers might have to inform on co-workers. The 1997

study found that only three

firms were deemed to be “criminal purpose organizations.”

The vast majority of the

defendants (88 percent)

were convicted after

pleading guilty (including

two organizations that

pleaded nolo contendre).

And more than four-fifths

of the organizations, most

of which cooperated with

the authorities, accepted

responsibility for their

crime(s).

Almost two-thirds of the organizations examined were

placed on terms of probation

averaging more than three

years, and most of those sentenced to probation received

fines, which ranged from $800

to $15.5 million. Restitution,

which several organizations

were ordered to pay, ranged

from $429 to $3.7 million. The

most important variable associated with whether organizations were fined was whether

the court considered them able

to pay the fine without adversely affecting innocent third

parties such as victims and employees (USSG §8C3.3).
Determining that the defendant or offender is career rather

than situational will dictate

more intense supervision. Regardless of defendant or offender type, the officer should

monitor the individual or

entity’s money management

habits closely during the first 90

to 120 days of supervision. In

cases of probation or supervised

release, the officer should also

develop a payment plan for

fines and restitution.

The legwork completed by

pretrial services and presentence report writers is important to the probation supervision officer. The information

gathered at these two stages is

the starting point for the

officer’s review of the offender’s

financial standing after incarceration. In most cases, probation or supervised release is the

stage where offenders are least

cooperative. Having served

their prison sentences they are

unmotivated to pay fines and

restitution. Pretrial, presentence, and post incarceration

(supervision) financial reviews

almost always present two if not

three different pictures as the

officer begins tracking assets.

The probation supervision officer may therefore find it helpful to meet with the pretrial services officer and presentence

investigator to get impressions

of their interaction with the

offender.

The probation supervision

officer should note that situational offenders, though generally at low risk of re-offending, may still require close supervision to help them change

the behavior that led to the

original offense.

According to retired U.S.

Probation Officer Rosemary De

More, writing in Federal Probation, many low-risk offenders

“cling fiercely to old ways and

fight mini-battles regarding

necessary change.” Officer De

More provides the following

example of a situational whitecollar offender:

One resistant probationer

was Y, age 39, who embezzled $17,303 from the

bank where she worked. Y

was both forthright (in the

probation department)

about her offense and

ashamed of it. Hence, she

disclosed that she got into

trouble after playing the

lottery and creating too

many bills but also that

she had kept the matter

from her entire family.

Y’s resistance centered on

her restitution, with Y

skimping on payments

while claiming to be

‘strained to the limit’ and

tenaciously hiding the

facts about sizeable deductions made regularly from

her pay. [W]hen pressured

by the court and a U.S.

attorney and a probation

officer seeking answers, Y

let the truth emerge: The

deductions were for charity, Y had allotted more to

that than to the victim.

SUPERVISION

TECHNIQUES

Most of the organizations examined were convicted of either “equity skimming” (i.e.,

embezzling funds or property

associated with federal housing

loans), price fixing, smuggling

goods, or money laundering.

Other offenses of conviction

included kickback schemes,

criminal copyright and trademark infringement, racketeering, gambling, regulatory violations involving food and

drugs, bank secrecy, and wildlife crime. The most common

special condition was requiring

the organization to develop a

compliance program. Less common were dissolution orders,

orders to sell the organization,

and debarment from federal

contracts.

Where the presentence investigator recommends development of a compliance program as a special condition, the

officer may also choose to recommend that supervision be

carried out in conjunction with

regulatory agency officials according to specific governmental regulations relevant to the

offender’s industry.

Note that it is not uncommon for organizations that have

been ordered to pay monetary

penalties to file for bankruptcy,

which can complicate collection efforts. Sometimes this

occurs prior to sentencing. A

presentence investigator who

suspects that an offender intends to file may want to approach the U.S. attorney’s financial litigation unit (FLU)

about requesting that the court

freeze the offender’s assets

pending development of a payment plan. ◆
Officer De More concludes

that such low-risk supervisees

“need to be held accountable,

and if they do not hold themselves so, the officer should intervene by putting things in

focus and by enforcing the

court order.” She stresses that

supervisees like Y often have

money management problems

caused by a failure to think

ahead, set goals, and take

charge, and that they may feel

stuck with self-defeating habits.

De More recommends that

officers use the Monthly Supervision Report’s section on earnings and other income with

verification (pay stubs) as a way

to review finances and money

management habits and help

the supervisee improve them.

Also, by requiring the supervisee to list debts, the Net Worth

and Cash Flow statements force

the individual to recognize difficulties and the importance of

dealing with them effectively,

De More points out. Using a

more precise money management tool such as a small notebook in which the supervisee

keeps track of every penny

spent over a one- or two-month

period is another good idea, she

says.

“Career” cases

Career white-collar offenders

(and defendants) present different supervision challenges.

These individuals are usually

punctual, polite, and friendly,

but they will often attempt to

bombard the officer with confusing, irrelevant information

to avoid answering questions.

They may also provide only a

portion of requested documents, produce false documents, or provide unrequested

or irrelevant documents.

Another trick is to try to isolate the officer from others who

might provide information on

their activities or business

transactions. Sometimes they

will use unwitting or gullible

associates to carry out schemes

insulating themselves from detection or accountability, or

will transfer assets to someone

else to hide them. Career offenders are also prone to threatening officers with legal action

In response, officers should

adopt a “detect and deter” approach. Financial investigation

should continue during supervision—especially during probation or supervised release.

Goals include uncovering unreported assets to be sold or

mortgaged, with proceeds going

toward fines and restitution;

verifying the source and

amount of income and true living expenses to increase the

monthly payment schedule;

and detecting and authenticating new criminal conduct.

One of the biggest challenges

in dealing with those who commit fraud is locating hidden assets. In addition to consulting

pretrial and presentence reports

and financial information developed by investigating agencies (such as the FBI), officers

may find it helpful to seek out

financial information obtained

when the offender was providing it openly or for a purpose

that would prompt truthful reporting, such as a residential

mortgage application. Comparing this information with the

offender’s current Net Worth

and Cash Flow statements can

reveal inconsistencies for the

officer to pursue.

Because their supervision

can be extremely time consuming sophisticated white-collar

defendants and offenders

should do the legwork whenever feasible. Demand verification and documentation such

as bank account statements.

Always provide a deadline

when a document or information is due. If the defendant or

offender does not provide a requested document, demand it

again and continue to demand

it until the information is satisfactorily produced. Verify it

independently.

Officers should staff problem

cases with their supervisor and,

if necessary, seek out both inhouse and outside experts in

fields related to the specific issue or concern. Outside expertise can be found in governmental regulatory agencies, law

enforcement agencies, and

trade and professional organizations. (See back page, “Resources for Technical Assistance”). With the court’s approval, the probation officer

may request relevant information about offenders from

private fraud examiners. This

tactic has been used successfully

in the Western District of

Texas.

Officers should not take reports of net salary at face value.

For example, a defendant or offender who works on commission could be compensated

from a special payroll account

separate from the normal

schedule, or he or she may re13 Special Needs Offenders Bulletin ◆ February 2001 ◆ White-collar Offenders
Special Needs Offenders Bulletin ◆ February 2001 ◆ White-collar Offenders 14

ceive a bonus. Also, the individual may have the employer

withhold more than his or her

tax liability, resulting in a large

refund at the end of the year.

The officer should be skeptical

if withholding is more than

25% of gross income. In addition, the defendant or offender

may arrange for his or her tax

refund to be applied to the next

year’s estimated tax.

In the probation context, the

officer should instruct the offender not to make such application in the future. Close review of tax returns can reveal

such activity (see line 64 of IRS

Form 1040). Keep in mind that

blank IRS forms W-2 and 1099

are easy to obtain. Income information should be scrutinized

closely and collateral means

used to verify employment and

income. Legitimate companies

do not pay employees in cash

because this makes record keeping difficult.

The officer should likewise

be suspicious of defendants or

offenders who are “independent contractors,” who are in

dire financial circumstances but

pay their bills on time, or who

do not accumulate debt despite

minimal reported net income.

Finally, the officer should look

closely at defendants and offenders who consistently report

expenses that exceed reported

net income or who appear to be

living above their means. In either case, the defendant or offender is over-reporting expenses, is not actually making

payments to creditors, or has an

undisclosed source of income.

Of course, probation officers

should visit offenders at their

fender has liquidated assets sufficient to pay monetary penalties in full, the officer should

demand immediate payment.

Lump sum payment permits

the officer to focus supervision

energies elsewhere. Moreover,

repayment over several years

results in the victim not being

made whole due to dollar devaluation over time. Note that

incarcerated offenders may try

to hide or transfer assets when

they come out on furlough.

Therefore, the officer should

attempt to establish communication with the Bureau of Prisons in order to track furloughed

white-collar offenders.

Organizations

Organizations sentenced to

place of business. Offenders

should be required to submit a

written description of proposed

self-employment activities to

the officer for approval of the

self-employment. Defendants

should do the same where consistent with special bond conditions. (See box p. x).

Demanding that an offender

sell an asset to obtain cash for

monetary penalties will likely

have tax consequences. It may

be more advantageous to require the offender to borrow

from or mortgage assets. The

officer should never demand

that the offender obtain an

uncollateralized loan to pay

monetary penalties because this

may end up substituting one

victim with another. If the of-

➪ Become familiar with

the offender’s corporate

structure, offense conduct, and sentence by

closely reviewing the

presentence report and

order.

➪ Where development of

a compliance plan is a

special condition, understand the regulatory

standards governing the

program.

➪ Establish proactive

relationships and maintain regular contact

with corporate representatives and with

regulatory officials.

➪ Maintain close contact

with the U.S. attorney’s

FLU.

➪ Update the court regularly on the offender’s

compliance with special

conditions and any other matters about which

the court may be concerned (e.g., payment of

monetary penalties, failure to develop or violation of the compliance

program, difficulties

with corporate representatives or regulatory officials, etc.).

Tips for Supervising

Complex Organizations

Special Needs Offenders Bulletin ◆ February 2001 ◆ White-collar Offenders 14
Selected References

Administrative Office of the U.S. Courts, Federal Corrections and

Supervision Division. Criminal Monetary Penalties: A Guide to the

Probation Officer’s Role (Monograph 114). Washington, D.C.:

Administrative Office of the U.S. Courts (2000).

De More, Rosemary. “’I’m Not a Criminal’: Working With Low-Risk

Supervisees.” Federal Probation 59 (December 1995): 34.

Federal Judicial Center. Financial Investigation Desk Reference for U.S.

Probation and Pretrial Services Officers: Washington, D.C.: Federal

Judicial Center (December 2000).

Green, Gary S. “Organizational Probation Under the Federal

Sentencing Guidelines.” Federal Probation 62 (December 1998):

25.

Kusic, Jane Y. “Special Report: New Dimensions in Understanding

Economic Crime: The Common Characteristics of White-Collar

Criminals.” White Collar Crime Fighter 1 (May 1999): 1.

Pilchen, Saul M. “When Corporations Commit Crimes: Sentencing

Under the Federal Organizational Guidelines.’” Judicature 78

(January–February 1995): 202.

Slotter, Keith. “Investigative Assets: The CPA’s Role in Detecting

and Preventing Fraud.” FBI Law Enforcement Bulletin (July

1999): 1.

U.S. Department of Justice, Federal Bureau of Investigation

Investigative Training Unit. White Collar Crime. Quantico,

Virginia: U.S. Department of Justice (undated).

U.S. Sentencing Commission. 1999 Sourcebook of Federal Sentencing

Statistics. Washington, D.C.: U.S. Sentencing Commission

(2000).

Wedge, Sam; U.S. Probation Office for the District of Oregon.

Financial Investigation Handbook (unpublished) (1995).

Weisburd, David; Wheeler, Stanton; Waring, Elin; and Bode, Nancy.

Crimes of the Middle Classes: White-Collar Offenders in the Federal

Courts. New Haven, Connecticut: Yale University Press, 1991.

Special Needs Offenders Bulletin

a publication of the Federal Judicial Center

No. 6, February 2001

Written by

Mark Sherman

Education Specialist

Court Education Division

Edited and designed by

Nathan Dotson

Communications Policy & Design

Send questions or comments to Mark Sherman, Court

Education Division, Federal Judicial Center, Thurgood

Marshall Federal Judiciary Building, One Columbus

Circle, N.E., Washington, D.C. 20002-8003.

This publication was undertaken in furtherance of the

Center’s statutory mission to develop and conduct education programs for judicial branch employees. The

views expressed are those of the author and are not

necessarily those of the Federal Judicial Center.

probation with a special condition requiring development

of a compliance program can be

difficult to supervise, especially

if the organization is complex

and its work is technical in nature. Depending on the extent

of special conditions, the officer

will most likely have to conduct

supervision in accordance with

regulatory standards and in

conjunction with court-approved governmental regulatory officials.

The officer will have to work

with representatives of the offender to establish the payment

plan for monetary penalties. If

the offender drags out this process, the court may be required

to intervene. Moreover, the offender may file for bankruptcy

protection, making collection

of monetary penalties still more

difficult.

When reviewing bankruptcy

records, the officer should

check the “summary of schedules,” which will provide an

overview of all documents filed

in a case. A debtor who fails to

list assets on his or her bankruptcy schedules commits

crimes of concealment and

making false statements. Concealment may take the form of

omission of assets or undervaluation of assets.

Finally, the officer should attempt to establish a relationship with the U.S. attorney’s

FLU, which can help in uncovering assets by subpoenaing financial and organizational

documents, obtaining freeze

orders, and providing other assistance related to enforcement

of restitution orders and collection of monetary penalties. ◆
Federal Agencies

Federal Bureau of Investigation

• Financial Crimes Section

935 Pennsylvania Avenue, N.W.

Washington, DC 20535-0001

(202) 324-5595; www.fbi.gov

Maintains white-collar crime coordinators in field

offices throughout the country.

• FBI/National White Collar Crime Center

Internet Fraud Complaint Center (IFCC)

www.ifccfbi.gov

For law enforcement and regulatory agencies at

all levels. Offers a central repository for complaints related to Internet fraud, quantifies fraud

patterns, and provides timely statistical data of

current fraud trends.

U.S. Department of the Treasury

• U.S. Secret Service

Financial Crimes Division

950 H Street, N.W.

Washington, DC 20001

(202) 435-5850; www.treasury.gov/usss

Investigates counterfeiting and credit card fraud.

• Financial Crimes Enforcement Network

(FinCen)

Office of Investigative Support

2070 Chain Bridge Road, Suite 200

Vienna, VA 22182-2536

(703) 905-3502; www.treasury.gov/fincen

Maintains databases providing support to law

enforcement agencies. The financial database

contains statutorily mandated financial institution reports and records of certain transactions,

including reports filed pursuant to the Bank Secrecy Act (BSA). BSA records contain information on large currency transactions, suspicious activity, casino transactions, international

movements of currency, and foreign bank accounts. Not readily available from any other

source, this information is invaluable to investigators because it preserves a financial paper trail

they can use to track criminals and their assets.

Commercial database products include information such as state corporations, property, people

locator records, professional license, and vehicle

registration. Law enforcement databases include

(through written agreements with each agency)

Treasury bureaus, Drug Enforcement Administration, Department of Defense, and Postal

Inspection Service. These databases provide the

status of current or closed investigations as well

as information gathered from informants, surveillance, and other sources.

Private Organizations

NASD Regulation

Public Disclosure Program

9513 Key West Avenue

Rockville, MD 20850

(800) 289-9999; www.nasdr.com

The regulatory subsidiary of the National Association of Securities Dealers, NASDR provides

an effective mechanism for investors and others

to obtain information about and verification of

NASD member firms and their associated persons.

Association of Certified Fraud Examiners

(800) 245-3321; (512) 478-9070

www.cfenet.com

International professional organization dedicated

to fighting fraud and white-collar crime. With

offices in North America and Europe—and

chapters around the globe—the Association is

networked to respond to the needs of anti-fraud

professionals everywhere. Benefits and services

offered by the Association include professional

education products (self-study videos, workbooks, CD-ROMs, etc.), The White Paper

(a bimonthly magazine), EthicsLine (a subscription-based company employee hotline), and

numerous national and international seminars

and conferences devoted to continuing education about fraud. Services also include Continuing Professional Education (CPE) credits, onsite customized training, and a locator service

for fraud examiners.

Dun and Bradstreet Inc.

Austin, TX 78731

(800) 234-3867; www.dnb.com

Provides credit and corporate information. The

company’s products and services are drawn from

a global database of more than 60 million companies. It gathers business information in 209

countries around the world, covering 186 currencies.

National Association for Bank Security

4800 S.W. 51 Street, Suite 101

Fort Lauderdale, FL 33314

(954) 327-1223; www.banksecurity.com

Provides information and education regarding

security, financial crimes, Bank Secrecy Act

compliance, and OFAC compliance, as well as

interpretation and analysis of related federal laws

regulations.

Internal Revenue Service

• Criminal Investigations Division

1111 Constitution Avenue, N.W.

Washington, DC 20224

(202) 622-3200; www.irs.treas.gov

Conducts criminal investigations and provides

transcripts of taxpayer accounts to authorized

persons.

Federal Trade Commission

CRC-240

Washington, DC 20580

www.ftc.gov

(202) 326-3300 (Bureau of Competition)

(202) 326-3042 (Bureau of Consumer Protection)

Maintains regional offices across the country and

enforces a variety of federal antitrust and consumer protection (anti-fraud) laws.

U.S. Securities and Exchange Commission

• Enforcement Division

450 Fifth Street, N.W.

Washington, DC 20549-0202

(202) 942-4500; www.sec.gov/enforce.htm

Maintains field offices across the country and

enforces federal securities laws. Responsibilities

include investigating possible violations of federal securities laws and recommending appropriate remedies for consideration by the Commission. Also works closely with criminal authorities in matters of mutual interest. Investigations frequently concern the sale without registration of securities subject to the registration

requirements of the 1933 Securities Act, or the

misrepresentation or omission of material facts

concerning securities offered for sale, whether

or not registration is required. Investigations relate to manipulating market prices of securities,

misappropriating or illegally pledging customers’

funds or securities, conducting a securities business while insolvent, buying or selling of securities by broker-dealers at prices not reasonably

related to the current market, and violating broker-dealer responsibilities to treat customers

fairly.

Social Security Administration

6401 Security Boulevard

Baltimore, MD 21235

(800) 772-1213; www.ssa.gov

Provides employment verification information.

Federal Deposit Insurance Corporation

• Division of Compliance and Consumer

Affairs

550 17th Street, N.W.

Washington, DC 20429

(202) 942-3454; www.fdic.gov

Investigates and supervises failing banks.

RESOURCES FOR TECHNICAL ASSISTANCE