Ancient Corruption

This fraudulent practice - older than time - can be summed up simply in two sentences: "If someone is taking payoffs, then they're doing something they shouldn't officially be doing. Look for what that something is, and you'll find the answer."

Bribery and corruption are two of the oldest white-collar crimes known to mankind. The tradition of the "paying off" of public officials or company insiders for preferential treatment roots itself from the crudest business systems developed. Bribery, it could be argued, is mankind's second oldest profession.

Certainly one of the most infamous cases of bribery in early history was that of Judas Iscariot, the disciple who betrayed Jesus Christ. Iscariot was paid 30 pieces of silver by the chief priest and elders of Jerusalem to disclose the location of Christ during the night so that he could be captured and executed; during the day, Christ was readily visible but the elders feared a backlash from the Passover pilgrims in Jerusalem if they attempted to apprehend him. The city elders and political heads saw Christ as a serious threat to their power and ability to preside over the land.

Judas led an armed guard to the garden of Gethsemane, where Christ prayed with the other disciples. He identified Christ by kissing Jesus on the cheek and whispering "Master." The city elders crucified Christ. In most versions of the biblical story, Judas was distraught about betraying Jesus and gave the silver pieces back to the elders and hanged himself shortly after.

In today's society, many turn to the realm of politics when thinking of bribery and corruption. While politicians may not have earned this reputation due to their collective lack of undignified activities, bribery and corruption are not by any stretch of the imagination limited to the political realm. In the business world, kickbacks, bribes, and other forms of corruption are all-prevalent when situations of potential contacts of arrangements are concerned.

Bribery has been associated with government and politics before and after the time of Christ, which isn't surprising considering the relative power that politicians yield over the private sector. Because politicians' decisions can have a profound effect on particular private industries, and thus the fortunes of people in business, it's obvious that the private sector inevitably will attempt to influence the politician. However, attempting to influence a politician is one thing; flouting the law is quite another.

In a 1920s bribery scandal, which rocked Washington, D.C., the paper trail of corruption led back to the White House Cabinet and nearly implicated then-President Warren G. Harding. Known as the Teapot Dome Scandal, the incident surrounded a group of Naval oil reserves that were handled improperly by several key members of Harding's staff.

Teapot Dome, an oil reserve in Wyoming, as well as two other California oil fields, had been set aside by the government for the use of the U.S. Navy in case of an emergency. However, Teapot Dome was located near another private oil reserve and the government, fearing that the private oil field would drain Teapot Dome, authorized that the oil field could be contracted out to the private sector for limited drilling.

Newly appointed Secretary of the Interior Albert B. Hall, one of the President's closest friends and a former New Mexico Senator, seized the opportunity and wrestled control of the oil fields from the Navy by insisting that Harding decree Hall to be in charge of the oil fields.1 The Navy superiors objected vigorously in a letter to the President, but the letter mysteriously disappeared in route.2 Once in control of the fields, Hall contracted the field drilling to Olin Harry Sinclair, one of Hall's old cronies, and Hall and several other Cabinet members received kickbacks from the contract. This was only one of several dozen scams that Hall and company were operating but the lack of competitive bidding for the rights to the oil fields caught the attention of several U.S. senators, who spearheaded an investigation into the improprieties.

Hall didn't go quietly; the senators at the forefront of the investigation received numerous death threats and warnings.3 Hall also refused to admit that he had done anything unethical, claiming that bidding the oil field drilling jobs openly would have been a compromise to national security.

Ultimately, Hall was convicted and Harding's reputation was thoroughly tarnished. The President surrounded himself with the largest collection of crooks and con men that Washington has seen before or since, save possibly for the scandal-ridden Nixon administration in the 1970s.

In a different sort of corruption scheme, several vice presidents and other brass at General Electric, the Westinghouse Electric Corporation, and other companies, were called to the mat in one of the most high-profile collusion cases in history. The crime, which was prosecuted in 1961, is interesting for several reasons: 1) it was one of the first times a group of high corporate officers was tried and convicted of a "white-collar crime," 2) the executives committed antitrust violations in a manner that Dr. Gil Geis, CFE, describes as "willful and blatant" in nature, and 3) a lawyer on the defense team argued in court that his clients shouldn't be put "behind bars with common criminals who have been convicted of embezzlement and other serious crimes."4

Serious crimes? All these executives at two of the most powerful electric companies did was irreverently flaunt the Sherman Antitrust Act of 1890, which forbade any companies of price-fixing, price-gouging, or any other scheme to drive up the costs of industry-specific contracts. The General Electric and Westinghouse Company executives apparently agreed with several other large companies to submit identical bids for contracts with government entities such as the Tennessee Valley Authority, the governmental department that ultimately blew the whistle on the scam.5

The electric giants worked out an agreement, which stipulated that each conspirator company would receive 20 percent of the contracts bid. The ring allowed one company to bring in the lowest bid on a particular contract and the rest of the companies bid higher. The only problem was that in many cases, the companies agreed on identical bids for "losing" companies and some of the contractors caught on.6

When the participating companies' executives went on trial, they routinely dismissed the charges as technically illegal but certainly not immoral. The company heads argued one after another that they had conspired to rig the bidding process, yes, but weren't harming the public welfare because they hadn't stolen any property or embezzled any money.

The court found seven of the company executives guilty of breaking the Sherman Antitrust Act and sentenced each to 30 days in jail. The court also fined the companies involved $1,787,000 for the infractions.7 The light sentences, and the fact that each of the imprisoned executives was released five days early for good behavior, insinuate that the courts found the offenses nearly as acceptable as did the companies who perpetuated them. Since that time, however, both business as well as government regulation had begun to look much less favorably upon business practices such as these.

One recent and infamous example of high-ranking bribery and corruption that also occurred in the political realm was the ABSCAM case. In the late 1970s, the FBI worked in concert with an apprehended con man named Melvin Weinberg to nail several U.S. senators with bribery charges.8 The FBI agents posed as wealthy Arabs and videotaped numerous meetings with New Jersey Sen. Harrison Williams, in which Williams promised political sway in exchange for shares in an Arab-backed mining project. Williams went so far as to promise the "Arabs" that he would take a meeting with then-President Jimmy Carter to discuss Arab interests and bragged extravagantly of his political muscle.9

The federal government was shocked in the late 1980s and early 1990s by the improprieties of members of the U.S. Department of Housing and Urban Development (HUD). Officials in the department were discovered diverting resources, which were supposed to go to poverty housing projects, to wealthy land developers in exchange for kickbacks.10 The developers and contractors who received the HUD funds were also found to be high-paying contributors to the Reagan administration, and were well financed and well connected. The investigation also uncovered the improprieties of many former HUD officials who had repeatedly used their influences to arrange the illicit payments to the wealthy developers.11

Black's Law Dictionary defines corrupt as "spoiled; tainted; vitiated; depraved; debased; morally degenerate. As used as a verb, to changes one's morals and principles from good to bad."12 The authors obviously didn't think highly of those who are corrupt. They further define corruption as "act done with an intent to give some advantage inconsistent with official duty and the rights of others. The act of an official or fiduciary person who unlawfully and wrongfully uses his station or character to procure some benefit for himself or for another person, contrary to duty and the rights of others."13

My first official experience with bribery came when the FBI transferred me from El Paso, Texas, to New York, N.Y. At the time I was transferred, about one out of every seven FBI agents was assigned to the Manhattan office. As a result, the agents were divided into specialized squads, consisting of about 20 investigators and a supervisor.

Because there was an empty desk on the Bribery and Corruption Squad, that's where I found myself assigned. There was no other reason; I knew absolutely nothing about the topic. But I was about to learn. Over the next several years, I investigated part or all of several hundred cases. The most famous was the government's investigation of former U.S. Attorney John N. Mitchell for his role in Watergate. We sent him to prison. It seemed like a great accomplishment then - he did the crime and he did the time. But later, after he was released and all the media fury died down, Mitchell died a broken man. My pride in that conviction has since turned to pity. As Lord Action observed, "Power corrupts. And absolute power corrupts absolutely." Perhaps many of us placed in the same circumstances as Mitchell would fall victim to temptation.

Although Watergate was my most famous case, it wasn't my first. And for those of us in the investigative field, the initial time we encounter a situation is frequently our most memorable. My first bribery case involved allegations against a highly placed government civil servant, Herman Klegman. He was with the Immigration and Naturalization Service (INS) and held the title of district director. Klegman's area covered all of New Jersey.

As district director for INS, Klegman had the ultimate authority to issue all "green cards" in his district. For the uninitiated, a green card gives a non-U.S. citizen the right to live and work in the country without becoming a permanent citizen. Green cards are strictly allotted by foreign country, and may be very hard to come by legitimately, depending on the country of residence. Because mainland Chinese citizens at that time were especially likely to have their green card applications rejected, many of them immigrated illegally. Once in the United States, these illegal immigrants would find their way into the Chinese community. In New York City, many of them would work for the numerous Chinatown restaurants.

Unconfirmed rumors about Klegman's ethics had apparently circulated for years in INS circles. Finally, someone - presumably an employee - wrote the FBI an anonymous letter claiming Klegman was "on the take" from a New York Chinese restaurateur, Stanley Yee. No details were forthcoming and I had no idea where to start. So I spoke with the Corruption Squad's most experienced agent, Boyd Henry. He was a veteran of at least a thousand bribery cases and really knew how to cut through the fog. I asked Boyd how to prove such a case.

"Joe," Boyd said, "if someone is taking payoffs, then they're doing something they should not officially be doing. Look for what that something is, and you'll find the answer." Boyd was able to sum up the essence of investigating corruption in two sentences and I haven't forgotten it.

In the Klegman case, I reasoned that somehow he must be issuing green cards to Yee's workers in exchange for kickbacks. But this theory had an obvious flaw: Klegman's authority was limited to New Jersey only, and Yee's Chinese restaurants - 20 of them - were all located in New York.

I discussed the theory with Boyd, who said, "That must be it - Klegman is probably somehow issuing green cards to Chinese restaurant workers in New York City through his office in New Jersey. You need to focus on exactly how he could pull that off." Boyd's approach made perfect sense to me. Sol Saletre, my contact at INS, explained that an application for a green card is filed in the district of the immigrant's residence. So if Klegman issued green cards to workers in New York City, they would show a New Jersey residence. Otherwise, it would look too suspicious to the compliance auditors at INS, who periodically check the procedure for issuing green cards. The first step in proving the address theory was to find the personnel records of all the employees of Yee's 20 eating establishments - about 400 in total. We issued subpoenas to all the restaurants for their records. Once we had the names of Yee's Chinese workers, we searched them against INS records in New York and New Jersey.

Lo and behold, we hit pay dirt.

The search revealed a mysterious pattern with a dozen or so immigrants. It seemed their original immigration files were initiated in New York. Then, each of these immigrants, at different times, sent letters to the INS stating they had "moved" from New York to New Jersey. Their applications for green cards were thereafter processed in the New Jersey INS office by - you guessed it - Klegman himself. After their green cards were issued, each of these Chinese immigrants sent letters to the New Jersey INS office, stating that they had "moved" back to New York. Interestingly, all the letters looked to the naked eye like they had been prepared on the same typewriter.

I went back to Boyd for more of his sage advice. "Yes, Joe, you're on to something," he said. "But you've still got a long way to go. You haven't quite proved that Klegman has done something he shouldn't have officially done." First, to put a circumstantial case together, Boyd reasoned that a highly placed INS official like Klegman would never personally approve green card applications, even though he had the authority to do so. Saletra of the INS confirmed that it would be very unusual for the district director's signature to be on the application, as it was on these dozen or so Chinese immigrants' applications.

But Saletra's observations would have to be confirmed for court purposes. I only knew one way to do that, and so did Saletra: Someone would have to examine every immigration file in the District of New Jersey and inspect the approving official's signature. We reluctantly committed the manpower to do just that. Hundreds of hours of tedious labor later, we found exactly what we needed. Out of thousands of immigration applications in his district, Klegman's signature appeared only on the Chinese restaurant workers'.

Through Chinese FBI interpreters, we then interviewed the restaurant workers. To a man, they denied paying for their green cards. But during the interview process, we obtained bank account information from them and then subpoenaed those records. Each restaurant worker had made a $10,000 cash withdrawal from his savings account. Each withdrawal closely coincided with the approval date of that immigrant's INS application.

Boyd, my FBI mentor, smiled at my progress in the case. "In order to prove a bribery case, you're going to have to prove that Klegman got a 'thing of value' as required by the statute," he observed. "In most - but not all - cases, the 'thing of value' is going to be money. If you find where Klegman has stashed his bribe money, I think you have enough for a conviction." Finding the location of the stash proved more difficult than Boyd thought. "For some inexplicable reason," Boyd said, "most people taking cash, deposit some or all of it in their own bank accounts. Then they spend it. Look at his bank statements first," he suggested. I did. Nothing there. We then piecemealed a financial picture of Klegman indicating he wasn't living ostentatiously - no new homes, cars, or toys as far as we could tell. Then the Assistant U.S. Attorney Robert "Bolt" Beller, who was interested in prosecuting the case, pulled Klegman before the grand jury. Klegman didn't take the Fifth - he cooperated fully but denied everything.

Then, as is standard in corruption cases, Bolt offered a deal to Yee that he couldn't refuse: Cooperate with the government and we'll go easier on you. Eventually, Yee came into the FBI office with his lawyer. In exchange for a reduced sentence, Yee furnished the key information. Yes, he had paid Klugman, he admitted. They had an arrangement - for every green card issued to one of Yee's restaurant workers, the illegal immigrant would pay Yee $10,000. In turn, Yee would pay that money to Klegman. The arrangement had been going on for years, and Yee estimated he had paid Klegman at least $250,000 in bribes.

But where did Klegman stash the ill-gotten gain? In Israel, Yee said, in a secret bank account Klegman had set up in Tel Aviv. We were able to confirm that through our international contacts. Klegman was indicted for bribery. A few days before his trial, Herman Simon Klegman entered a guilty plea and drew a modest prison term. Yee walked.

The lesson to be learned from such a difficult corruption case is that they are hard to prove. And in almost all cases, it's necessary to make a deal with the proverbial "bag man" like Yee. Making such deals originally grated against me. But one learns in the criminal justice system to take what you can get. Otherwise people like Klegman will go scot-free for bribery and corruption.

This article is adapted from "Occupational Fraud and Abuse," Chapter 10, by Joseph T. Wells, CFE, CPA, ©1997, Obsidian Publishing Company Inc., Austin, Texas.  

Joseph T. Wells, CFE, CPA, is the founder and Chairman of the Association of Certified Fraud Examiners.

1 Bruce Bliven, "The Tempest Over Teapot," American Heritage, September-October, 1995.
2 Charles L. Mee Jr., The Ohio Gang: The World of Warren G. Harding (New York: M. Evan and Company, 1981).
3 Dale R. Gardner, "Teapot Dome: Civil Legal Cases That Closed the Scandal," Journal of the West, October 1989.
4 Gilbert Geis and Robert F. Meier. White-Collar Crime, Revised Edition (New York: The Free Press, 1977).
5 Geis.
6 Geis.
7 Geis.
8 Gerald M. Caplan, ABSCAM Ethics: Moral Issues & Deception in Law Enforcement, (Cambridge: Ballinger, 1983).
9 Caplan.
10 Larry J. Siegal, Criminology, 4th Edition (New York: West Publishing Company, 1993).
11 Seigel.
12 Black, p. 311.
13 Black, p. 311.