White Collar Crimes

“What is the robbing of a bank compared to the founding of a bank?”
B. Brecht

The 2008 financial crisis that sent the economy into a tailspin posed questions about effective investigation and prosecution of white collar crimes.

Social unrest called for more transparency and accountability from financial corporations. Still, the question remains whether governments have learned the lessons from the crisis and seen the social turmoil as an opportunity to close loopholes and flaws in legislation and invest in effective and objective investigation.

Combating white collar crime first requires developing adequate social consciousness of the crime’s manifestations. This is especially difficult when a society has gotten into the habit of tolerating corruption, with no elaborated legal culture and no trust in the objective and independent functioning of the judicial system. The lack of an adequate and proactive civil reaction makes it easier for the state to close its eyes and neglect its regulatory functions, and makes it more susceptible to influence from parallel social structures (i.e., oligarchy). This vicious circle becomes thriving soil for corruption, bribery, and fraud.

At the beginning of the 1990s, the Bulgarian market was liberalized. But the regulatory framework was caught unprepared for the challenges of shady transitional times. In a legal vacuum and harsh economic conditions, petty white collar crimes proliferated in every corner, ranging from small cash bribes to traffic police and customs officers, to tax and social security dodging, to corruption of government officials.

The transition period also polished a new oligarchical class. Its representatives became well educated, smart, and well connected. They enjoyed media silence and institutional comfort. On top of everything, they enjoyed staying above the law.

The behaviour of foreign investors was another element affecting the Bulgarian context of white collar crimes throughout its conversion to a market economy. The “wicked” transition opened up opportunities for shady foreign investments. Even reputable foreign companies learned the name of the game and adapted to the local climate. This was especially common in cases where foreign investors wanted to avoid a heavily bureaucratic administration and an ineffective judicial system unable to guarantee investment protection. By sparing court costs and time, investors were often lured into fixing the problem by payment of a “small cash.” Thus, foreign investments also fed bribery and corruption on the local market.

Today, Bulgaria is still seeking to define the line between creative and aggressive entrepreneurial activity and fraud. Although the country is not starting from scratch in terms of legislation, it finds it difficult to implement adopted rules. Enforcement deficiencies have resulted from a lack of expertise and investment in the investigation departments. Poorly paid and trained investigators have been unable to resist corruption pressure. Another major issue is the objectivity of the judicial system, as nepotism and a lack of transparency are still major concerns in the magistrate selection procedures. Moreover, Bulgaria is still tackling the challenge of ensuring a professional and objective functioning of its regulatory oversight authorities. The latest 2014 crash of a major Bulgarian bank again raised questions about the credibility of financial oversight.

In Bulgaria, companies have faced two major manifestations of white collar crime: crimes committed within a company and those targeting a company from outside.

The first group has been more complex to tackle, as the company required pressure from the outside world for catalyzing investigations. The Bulgarian legislature might have had good intentions by allowing for the foundation of limited companies with capital of BGN 2 (approximately EUR 1). What was behind the BGN 2 is, however, questionable. Similar to tax preferences, this is another example of how financial incentives could drive laundered capitals. White collar crimes within the company especially raise a question about manager liability. In Bulgaria, corporate entities are not criminally liable. This provides a niche for managers to hide behind collective, and non-punitive, corporate responsibility. Although Bulgarian law generally provides for the criminal liability of managers, board members, and procurators, particularly for concealment or delay of insolvency, enforcement of this liability is practically at zero.

Investigating white collar crimes targeting a company from outside could be facilitated by the company itself, as it is easier to win management and employees over when they do not feel personally threatened by the investigation. Typical Bulgarian cases of targeting a company are fraud through suppliers or embezzlement, particularly in car leasing. On the crossroad between East and West, Bulgaria especially faces the challenge of combating illegal organized channels of embezzled vehicles going to the Middle East and West Europe. The organizers of these illegal channels also profit by the cracks in the system such as corruption within police and customs.

Indeed, no other crimes can slip through the cracks in the system as well as white collar crimes. The Bulgarian legislature has recently adopted amendments to the Criminal Code allegedly closing loopholes in social security. The amendments thus foresee up to 5 years in prison and penalty for evasion of social security contributions. Still, the question is not just to produce laws for small-fry cases but effectively to enforce the adopted rules through accountable and independent authorities. In Bulgaria, no higher-ups have ever been convicted of corruption.

By Desislava Todorova, Senior Associate and Head of the Bulgarian White Collar Crime Practice Group, CMS Reich-Rohrwig Hainz

This Article was originally published in Issue 2.2. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.