The FBI shifted agents and other budget resources toward fighting terrorism in certain parts of the country, and financial fraud and insider trading ran rampant, according to research by Trung Nguyen.
After the 9/11 terrorist attacks, the FBI shifted financial resources and hundreds of agents toward combatting terrorism, unintentionally weakening the agency’s ability to investigate white-collar crime in America, research shows.
As a result, wire fraud, illegal insider trading, and financial fraud increased significantly, particularly in regions where the FBI focused its counterterrorism efforts, according to a study by Harvard Business School Assistant Professor Trung Nguyen.
The study is among the first to link the FBI’s post-9/11 emphasis on counterterrorism to a corresponding rise in white-collar crime. The findings not only highlight the potential perils of devoting limited law-enforcement resources to one area of crime, says Nguyen, but they offer a cautionary tale for any organization considering a radical budget shift in reaction to a seemingly more immediate need.
“(Leaders) need to know what the major consequences could be if a reallocation is handled properly.”
“The reason for a switch in resources is not the issue. What’s important is that leaders of organizations need to study the benefits they can get from reallocation of their resources—and the benefits they won’t get,” Nguyen says. “They need to know what the major consequences could be if a reallocation is handled poorly.”
She outlined her findings in the March Journal of Accounting Research article The Effectiveness of White-Collar Crime Enforcement: Evidence from the War on Terror.
White-collar crime cutbacks
Previous studies have delved into the fact that the threat of prison time and fines can deter white-collar criminals from committing crimes that can greatly harm corporations, investors, and consumers alike, not to mention financial markets and the economy in general.
Yet, as Nguyen writes in her study, it “remains a puzzle why financial fraud persists despite the severity of the penalties for and negative consequences of being caught.” Her study set out to probe the extent to which FBI enforcement deters white-collar crime.
“The FBI plays an important role in the prevention of white-collar crime.”
Nguyen examined the FBI’s priorities following the “shock” of the 9/11 terrorist attacks in 2001. Published reports estimated that the FBI diverted as many as 1,800 agents to terrorism-related investigations. Indeed, internal FBI data reveals that the cutbacks were particularly severe for staffing of white-collar crime investigations, with a loss of 36 percent from its 2001 levels, Nguyen writes.
Why did those investigations suffer? White-collar crime investigations, which can range from Ponzi schemes to accounting fraud, can take months, if not years, before they lead to potential prosecution. These cases require agents to sift through vast amounts of data and sometimes physically surveil suspects—cost- and time-intensive efforts, Nguyen notes.
FBI investigates Muslim communities
Nguyen focused on the FBI’s decision to beef up counterterrorism investigations in areas of the country densely populated by Muslim residents, such as in Michigan, New Jersey, and New York, among other regions. The study suggests the agency put these areas under greater scrutiny due to the involvement of Islamic extremists in the 9/11 attacks.
Using models that controlled for demographic, economic, and other variables, Nguyen’s analysis found that the FBI referred 15 percent fewer white-collar cases for prosecution in judicial districts whose corresponding FBI field offices had a larger portion of Muslim residents. In particular, the number of securities fraud cases declined by 12 percent and financial institution fraud cases fell by 16 percent.
White-collar crime spikes
At the same time, however, fraud was running rampant. For example, the areas Nguyen studied saw a 40 percent increase in the rate of wire fraud.
Meanwhile, banks were sounding alarms. The study found a 22 percent increase in the rate of Suspicious Activity Reports (SARs) filed by financial institutions, which cover such crimes as checking fraud, commercial loan fraud, and self-dealing.
“Overall, the findings suggest that the FBI’s reallocation of resources toward counterterrorism following 9/11 was accompanied by significant increases in wire fraud, opportunistic insider trading, and fraud within financial institutions,” Nguyen writes in her study.
With enforcement comes deterrence
Nguyen stresses that there is no evidence that Muslim communities before or after 9/11 were more or less prone to white-collar crime compared with other areas of the country. Rather, the findings indicate that spikes in white-collar crime likely occurred because criminals in those areas realized that they faced less FBI scrutiny and could get away with breaking the law.
“Allocating additional resources to the FBI’s white-collar criminal enforcement program is likely to help the agency prevent such crimes.”
The good news: The FBI’s pre-9/11 level of enforcement effectively deterred white-collar crime at that time, so providing greater funding in the future would likely make a difference, Nguyen says.
The findings “suggest that the FBI plays an important role in the prevention of white-collar crime and that allocating additional resources to the FBI’s white-collar criminal enforcement program is likely to help the agency prevent such crimes,” Nguyen says.