tag:theconversation.com,2011:/fr/topics/financial-fraud-36515/articles
Financial Fraud – The Conversation
2023-07-12T07:25:14Z
tag:theconversation.com,2011:article/209585
2023-07-12T07:25:14Z
2023-07-12T07:25:14Z
Australia can learn from the UK’s experience by making banks pay for scam losses
<figure><img src="https://images.theconversation.com/files/536982/original/file-20230712-17-4d2fj4.jpg?ixlib=rb-1.1.0&rect=0%2C454%2C4888%2C2462&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>British banks will soon be required to reimburse customers who fall victim to authorised push payment fraud – where a scammer convinces you to authorise a payment, generally by masquerading as a legitimate business or person.</p>
<p>The new rules from the UK’s <a href="https://www.psr.org.uk/">Payment Systems Regulator</a> are intended to incentivise all businesses involved in payments to take more action against scam activity, with reimbursement costs split 50:50 between the bank that sends and the bank that receives the payment.</p>
<p>There is a strong case that banks and other payment providers in Australia (and New Zealand) should be made to do the same. Scam-related losses are soaring, and banks are falling short of detecting, stopping and recovering losses.</p>
<p>In 2022 Australians <a href="https://www.accc.gov.au/system/files/Targeting%20scams%202022.pdf">lost at least $3.1 billion</a> to scams – an 80% increase on 2021. The Australian Competition and Consumer Commission says the actual losses were far higher, because about 30% of victims don’t report their loss to anyone.</p>
<p>While the biggest losses came from investment scams (totalling $1.5 billion), payment redirection scams – where a scammer impersonates a business or individual asking for payment – amounted to A$224 million. </p>
<p>Among the most vulnerable groups are older people (25% of losses were reported by those aged 65+), people with a disability (6% of reported losses), and people from culturally and linguistically diverse communities (almost 10% of reported losses).</p>
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Read more:
<a href="https://theconversation.com/australians-lost-more-than-3bn-to-scammers-in-2022-here-are-5-emerging-scams-to-look-out-for-204018">Australians lost more than $3bn to scammers in 2022. Here are 5 emerging scams to look out for</a>
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<h2>What are Australian banks doing?</h2>
<p>No regulations oblige Australian banks to reimburse scam victims, though some banks
have self-governed reimbursement policies. </p>
<p>While banks have dedicated fraud teams to prevent scams and support victims, the most recent review of the four major banks’ processes by the Australian Investments and Securities Commission, <a href="https://download.asic.gov.au/media/mbhoz0pc/rep761-published-20-april-2023.pdf">published in April</a>, says they detected and stopped just 13% of scam payments.</p>
<p>Reimbursement policies and practices varied from bank to bank but the overall rate was low – ranging from 2% to 5%.</p>
<p>The review described the banks’ approaches to liability, reimbursement and compensation as “inconsistent and generally very narrow”.</p>
<h2>Why the UK has made banks responsible</h2>
<p>The greater obligations being imposed on British banks follows attempts by the UK’s <a href="https://www.psr.org.uk/">Payment Systems Regulator</a> to improve consumer protections through a voluntary code of conduct. </p>
<p>Introduced in May 2019, this voluntary code was intended, under certain conditions, to ensure the reimbursement of victims of “authorised push payment” scams. These conditions included the customer taking reasonable care and notifying any scam incident to the bank.</p>
<p>It had modest success, with <a href="https://www.psr.org.uk/news-and-updates/latest-news/news/psr-sets-out-proposals-to-give-greater-protection-against-app-scams/">46% of reported scam losses</a> being reimbursed between 2020 and 2022.</p>
<p>But the Payment Systems Regulator wants 95%. So it has pressed for a mandatory reimbursement scheme. Under the new provisions money must be reimbursed within 48 hours of a fraud being reported. </p>
<p>The idea is to get banks to put more effort into detecting and preventing scams.</p>
<p>Overall, the UK has accepted the need for a more regimented regulatory approach over a market-based one.</p>
<h2>A more pragmatic approach needed</h2>
<p>While the Australian Investments and Securities Commission’s own reports have revealed the sorry state of scam prevention, management, and reimbursement practices at major banks, the regulatory body is still not walking in the footsteps of the UK. It is instead advising banks to improve their governance and scam management practices. </p>
<p>The Australian Banking Association, which represents the banking sector, has strongly argued against regulation supporting mandatory reimbursement. It has even suggested this <a href="https://www.smh.com.au/business/banking-and-finance/big-banks-fight-push-for-billions-of-dollars-in-scam-refunds-20220131-p59sp3.html">could increase scamming losses</a> because of the risk customers will take less care if they know any losses will be covered by their bank. It has called for greater personal responsibility in preventing scam losses. </p>
<p>But such an argument ignores the effects of the digitisation push by financial service providers, which has made scamming so much easier. Scammers are also becoming more sophisticated. </p>
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Read more:
<a href="https://theconversation.com/scams-deepfake-porn-and-romance-bots-advanced-ai-is-exciting-but-incredibly-dangerous-in-criminals-hands-199004">Scams, deepfake porn and romance bots: advanced AI is exciting, but incredibly dangerous in criminals' hands</a>
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<p>The statistics speak for themselves. Scamming losses are increasing. Recovery rates are meagre. A more pragmatic approach based on this reality and banks’ fiduciary responsibilities is needed.</p><img src="https://counter.theconversation.com/content/209585/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Muhammad Al Mamun does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
The UK tried a voluntary code before making banks accountable for scam losses. Australia can learn from that lesson.
Muhammad Al Mamun, Senior Lecturer in Finance, La Trobe University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/205798
2023-05-21T10:12:25Z
2023-05-21T10:12:25Z
Get-rich-quick schemes, pyramids and ponzis: five signs you’re being scammed
<figure><img src="https://images.theconversation.com/files/526898/original/file-20230517-4617-k456k5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> </figcaption></figure><p>Consumers are under a lot of financial strain. The <a href="https://www.weforum.org/agenda/2022/09/cost-of-living-crisis-global-impact/">World Economic Forum</a> reports that the cost-of-living crisis is affecting people across the globe. With food and fuel prices rising, it’s becoming increasingly difficult to keep financially afloat. On top of that, salaries <a href="https://www.wsj.com/articles/workers-pay-globally-hasnt-kept-up-with-inflation-e6df92d">aren’t keeping up with inflation</a>, making it more difficult to save and build wealth.</p>
<p>It’s during such times of economic difficulty and uncertainty that fraudsters lure unsuspecting consumers into “<a href="https://www.sabric.co.za/">get-rich-quick</a>” schemes, offering <a href="https://www.sabric.co.za/stay-safe/ponzi-pyramid-schemes/">an avenue to make easy money</a> by investing in a “lucrative” financial opportunity. </p>
<p>Nothing beats the prospect of making easy money, and every now and again there seems to be a “get-rich-quick” scheme circulating on WhatsApp or on social media that seems legitimate. But it’s not. </p>
<p>Our research interests centre on financial systems in emerging economies, and we advocate for financial inclusion and empowering marginalised communities through financial literacy and financial planning. We use our academic platform to share our expertise on finance, including common financial traps people should steer clear of.</p>
<p>“Get-rich-quick” schemes are one such trap. They’re also sometimes called ponzi or pyramid schemes. The schemes are a form of <a href="https://www.lawinsider.com/dictionary/financial-fraud">financial fraud</a>. The people running them take money through deception: the misrepresentation of information and identity. They promise financial benefits that don’t exist.</p>
<p>You should avoid them because, more often than not, they are bogus and fraudulent business ventures. </p>
<p>There have been some massive fraud schemes over the past 30 years. In the early 1990s, <a href="https://www.independent.co.uk/news/world/africa/mmm-global-russian-ponzi-scheme-from-1990s-reborn-and-now-spreading-like-wildfire-in-africa-a7333366.html">MMM Global</a> - one of the world’s largest and most notorious ponzi schemes - defrauded up to 40 million people, who lost an estimated $10 billion. Ponzi schemes have since resurfaced in different forms in <a href="https://www.iol.co.za/weekend-argus/news/ponzi-scheme-investigated-as-some-victims-lost-as-much-as-r200-000-c3c3633c-2abb-4dd4-b668-a5ea608deb41">South Africa</a>, <a href="https://guardian.ng/business-services/nigerians-lose-over-n911b-to-ponzi-schemes-related-fraud-in-23-years/">Nigeria</a>, <a href="https://www.voazimbabwe.com/a/zimbabwe-money-pyramids-ponzi-schemes/6305100.html">Zimbabwe</a>, <a href="https://allafrica.com/stories/202105170964.html">Kenya</a>, <a href="https://doi.org/10.1108/JFC-09-2020-0177">Ghana</a> and several other African countries.</p>
<p>There are five tell-tale signs of a “get-rich-quick” scheme. Watch out for them.</p>
<h2>The five tell-tale signs</h2>
<p><strong>Firstly</strong>, they offer exaggerated and above-market returns within a short period of time, with the promise of little to no risk.</p>
<p>There are two golden rules when it comes to investing. The first is that it takes time to make money. Amassing a small fortune within a short space of time should raise questions about the scheme. </p>
<p>The second rule is: the higher the risk, the higher the return. In other words, no investment is risk free or can guarantee significant returns. There is always some risk involved. An investment that promises substantial returns tends to be quite risky, which repels most people with a low appetite for risk.</p>
<p><strong>Secondly</strong>, new members are constantly recruited to join the scheme.</p>
<p>Typically, such schemes are sustained by relying on the investments of new members to pay existing members. Once the number of existing members exceeds new members, the scheme goes “belly-up”. At best you lose out on the returns you were promised. At worst you lose all the money you’ve invested.</p>
<p>When the scheme collapses, it is almost impossible to recover the money you’ve lost because you’ve technically given it to a stranger (remember, the definition of financial fraud encompasses the misrepresentation of identity).</p>
<p><strong><strong>Thirdly</strong></strong>, there is urgency to join the scheme and no clarity on how the scheme works.</p>
<p>This is a classic characteristic of a “get-rich-quick” scheme. There is usually no clear answer about the nature of the scheme, what it invests in, how it generates its returns or the credentials of the organisation.</p>
<p>Legitimate investments are transparent and can provide investors with all the information they need to help them decide whether to invest. Unsurprisingly, a proper check of “get-rich-quick” schemes will unmask their fraudulent nature. This is why there’s always the urgency and coercion to make an immediate financial commitment under the guise of missing a once-in-a-lifetime opportunity to get rich.</p>
<p><strong>Fourthly</strong>, the scheme is not registered with or regulated by any recognised authority.</p>
<p>Regulatory authorities are important because they monitor the conduct of financial service providers and protect consumers by keeping their best interests in mind. The protection provided by financial regulators also instils confidence in financial systems. </p>
<p>“Get-rich-quick” schemes are not registered and operate outside the framework of regulatory bodies. This makes investors more vulnerable to loss and makes it more difficult to seek legal recourse when the loss occurs. </p>
<p>Legitimate investments in South Africa are offered by authorised financial service providers and regulated by the <a href="https://www.fsca.co.za/Pages/Default.aspx">Financial Sector Conduct Authority</a>. You can search for any authorised financial service provider on the authority’s <a href="https://www.fsca.co.za/Fais/Search_FSP.htm">website</a>.</p>
<p><strong>Fifthly</strong>, they use the testimonies from existing members who’ve earned big bucks to promote the scheme.</p>
<p>At the initial stages, the scheme tends to pay out to those who have invested early, and these members are encouraged to share the news of their wealth (which travels fast and far) to promote the scheme.</p>
<p>But this is a tactic used to create the impression that you too can earn returns in the double digits. These schemes are both unsustainable and unethical as one person gets wealthy through someone else being deceived.</p>
<h2>Too good to be true</h2>
<p>It’s worth repeating that if it sounds too good to be true, then it probably is.</p>
<p>Wealth comes from a sound investment strategy and decisions made over time. Any promise to “get rich quick” should be treated with the cynicism it deserves. It will ultimately reveal its fraudulent nature. Recognising the signs of “get-rich-quick” schemes can save you from unnecessary financial distress. </p>
<p>It’s always a good idea to do your own investigation before committing your finances into any investment. You can find more information on the various types of scams through the <a href="https://www.sabric.co.za/">South African Banking Risk Information Centre</a>’s website and report them to the <a href="https://www.safps.org.za/Home/Contact">South African Fraud Prevention Service</a>.</p><img src="https://counter.theconversation.com/content/205798/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Avoid ‘get-rich-quick’ schemes. They are, more often than not, bogus and fraudulent business ventures.
Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of Canberra
Abdul Latif Alhassan, Associate Professor in Development Finance & Insurance, University of Cape Town
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/203395
2023-04-13T19:42:32Z
2023-04-13T19:42:32Z
We need consistency in how we treat financial crimes. Sentencing guidelines are a good place to start
<figure><img src="https://images.theconversation.com/files/520658/original/file-20230413-303-ninavt.jpg?ixlib=rb-1.1.0&rect=52%2C22%2C4940%2C3278&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>As it stands in Aotearoa New Zealand, beneficiary fraud (fraud by people on benefits) is largely dealt with under the Crimes Act, while tax evasion is prosecuted under the Tax Administration Act. This, among other factors, means beneficiaries engaging in financial fraud face <a href="https://e-tangata.co.nz/comment-and-analysis/why-is-tax-evasion-treated-more-gently-than-benefit-fraud/">significantly stiffer penalties</a> than professionals doing the same.</p>
<p>This inconsistency in how fraud is handled in New Zealand underscores the strong case for ensuring financial crimes are treated the same. Sentencing guidelines are a good place to start.</p>
<p>To be fair, sentencing is more of an art than a science. The art is balancing consistency with fairness, alongside all the aims of sentencing: deterrence, denouncing the behaviour, holding offenders accountable, providing for the interests of the victim and, in some cases, protecting the community, assisting in rehabilitation, and providing reparation.</p>
<p>It probably goes without saying that the combination of these objectives creates a system that is multi-faceted and complex. What may be less clear is that the complexity generates the potential for inconsistencies in sentencing decisions. Sentencing guidelines could help.</p>
<h2>Creating clarity in a complex system</h2>
<p>Sentencing guidelines provide guidance to judges on the length and type of sentence that is appropriate for a particular offence. Typically they provide a sentencing range with some, usually limited, opportunity to depart from this range. Guidelines prescribe sentences based on the seriousness of the current offence, while considering any prior offending.</p>
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Read more:
<a href="https://theconversation.com/why-new-zealand-courts-should-take-poverty-into-account-in-sentencing-decisions-125799">Why New Zealand courts should take poverty into account in sentencing decisions</a>
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<p>This approach to sentencing is not unheard of in New Zealand. Guideline judgements exist for a range of serious offences, including aggravated robbery, sexual violation, grievous bodily harm and various categories of manslaughter. These guidelines primarily deal with offending that is likely to result in a sentence of imprisonment. </p>
<p>But this limited approach is problematic because inconsistency is more likely to occur at <a href="https://ojs.victoria.ac.nz/vuwlr/article/view/4917">lower levels of offending</a>. This is also where there is less transparency of sentencing outcomes as there is generally less media, and therefore public, attention on these cases.</p>
<p>There have been efforts to establish sentencing guidelines across the spectrum of offences. Nearly 17 years ago, the Law Commission raised the idea of an independent sentencing council to develop sentencing guidelines in New Zealand. </p>
<p>The council came close to a reality. A bill establishing the council passed in 2007 and subsequently received royal assent the same year. But the legislation was never introduced after the change of government in 2008. It was repealed in 2017. </p>
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<h2>Minimising inconsistency across all sentencing</h2>
<p>Research has <a href="https://journals.sagepub.com/doi/10.1177/0004865813483295">identified inconsistencies in sentencing practice</a> in New Zealand for many years. Findings include that the type of offender, the location of the court and/or the individual judge may influence the sentence handed down.</p>
<p>Sentencing guidelines can minimise these inconsistencies in sentences. Guidelines also offer a range of other benefits including:</p>
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<li><p>increased transparency</p></li>
<li><p>efficiency gains, as sentencing guidelines generate a single source reference for a judge</p></li>
<li><p>improving public trust and engagement in the sentencing process</p></li>
<li><p>removing the politicisation of sentencing, whereby judges may feel pressure – or may wish to – move in response to the prevailing political or public mood. </p></li>
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<p>We have seen this in action. In 2008, <a href="http://www.nzlii.org/nz/journals/CanterLawRw/2008/7.html">Justice Graham Panckhurst wrote</a>:</p>
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<p>sentence levels, and therefore the prison population, have increased in response to popular demand. </p>
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<p>The increased visibility that sentencing guidelines can bring is important for addressing either the presence of, or the potential for, institutional bias.</p>
<p>Independence of the judiciary is essential. And at least some level of discretion is necessary, to ensure that the judiciary can consider all relevant factors when making sentencing decisions. However, where there is complete discretion, there will be disparities.</p>
<p>Some of the clearest illustrations of these disparities can be seen in how we respond to financial fraud. </p>
<h2>The disparity in financial fraud</h2>
<p>Historically, there have been clear differences in the numbers of investigations and prosecutions, and severity of sentences, for tax evaders and benefit fraudsters. That said, this is changing. A similar number of tax evaders and benefit fraudsters are now prosecuted in New Zealand. </p>
<p>But there are still stark differences in how different types of financial fraud are dealt with. </p>
<p>My research, to be published later this year, found that between 2018 and 2020, most benefit fraud cases were prosecuted under the Crimes Act (83%) with 17% charged under the Social Security Act 1964. This situation reversed for tax cases, where 84% were prosecuted under the Tax Administration Act and 16% were prosecuted under the Crimes Act 1961. </p>
<p>The Crimes Act provides for harsher sentences than the Tax Administration Act. This is despite the tax offences typically comprising higher average values of offending.</p>
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<p>Sentencing guidelines cannot address inconsistencies of treatment prior to sentencing, such as the use of different charging legislation, or even choices about who is, or is not, investigated or prosecuted. </p>
<p>However, guidelines can limit discrepancies in the sentence. Moreover, they can provide an opportunity for greater public engagement, as justification is typically required when sentences are outside the specified range.</p>
<p>With this in mind, there is a strong case to revisit introducing sentencing guidelines in New Zealand for financial fraud – and potentially many other offences.</p>
<p>Perhaps the strongest argument for sentencing guidelines is that of fairness. To the extent that sentencing guidelines can minimise the potential for different outcomes for offenders who commit similar offences, they can positively contribute to the justice system.</p><img src="https://counter.theconversation.com/content/203395/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lisa Marriott does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
New Zealand came very close to having an independent sentencing council to help set sentencing guidelines for crimes. For the sake of consistency, it might be time to revive the idea.
Lisa Marriott, Professor of Taxation, Te Herenga Waka — Victoria University of Wellington
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/196729
2022-12-21T13:41:12Z
2022-12-21T13:41:12Z
FTX’s collapse mirrors an infamous 18th century British financial scandal
<figure><img src="https://images.theconversation.com/files/502186/original/file-20221220-20-ou8jt2.jpg?ixlib=rb-1.1.0&rect=69%2C155%2C5113%2C3279&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sam Bankman-Fried, once considered a star in the freewheeling world of cryptocurrency, has been charged with conspiracy, fraud and money laundering.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/this-photo-illustration-shows-the-logo-of-cryptocurrency-news-photo/1244760361?phrase=sam bankman-fried&adppopup=true">Stefani Reynolds/AFP via Getty Images</a></span></figcaption></figure><p><a href="https://www.marketplace.org/2021/09/23/enron-scandal-revisited-20th-anniversary-legacy/">Enron</a>. <a href="https://www.businessinsider.com/how-bernie-madoffs-ponzi-scheme-worked-2014-7">Bernie Madoff</a>. <a href="https://www.nbcnews.com/tech/crypto/sam-bankman-fried-crypto-ftx-collapse-explained-rcna57582">FTX</a>.</p>
<p>In modern capitalism, it seems as if stories of companies and managers who engage in fraud and swindle their investors occur like the changing of the seasons. </p>
<p>In fact, these scandals can be traced back to the origins of publicly traded companies, when the first stockbrokers bought and sold company shares and government securities in the coffee houses of London’s Exchange Alley during the 1700s. </p>
<p><a href="https://scholar.google.com/citations?user=8b_mnWQAAAAJ&hl=en">As a historian of 18th century finance</a>, I am struck by the similarities between what’s known as the Charitable Corporation Scandal and the recent collapse of FTX. </p>
<h2>A noble cause</h2>
<p>The <a href="https://www.degruyter.com/document/doi/10.1515/9783110592139-010/html">Charitable Corporation</a> was established in London in 1707 with the noble mission of providing “relief of the industrious poor by assisting them with small sums at legal interest.”</p>
<p>Essentially, it sought to provide <a href="https://www.jstor.org/stable/24429771#metadata_info_tab_contents">low-interest loans</a> to poor tradesmen, shielding them from predatory pawnbrokers who charged as much as 30% interest. The corporation made loans available at the rate of 5% in return for a pledge of property for security. </p>
<p>The Charitable Corporation was modeled on <a href="https://gala.gre.ac.uk/id/eprint/25216/1/25216%20GATTO_Historical_Roots_of_Microcredit_and%20Usury_2018.pdf">Monti di Pietà</a>, a charitable institution of credit established in Catholic countries during the Renaissance era to combat <a href="https://www.investopedia.com/terms/u/usury.asp">usury</a>, or high rates of interest. </p>
<p>Unlike the Monti di Pietà, however, the British version – despite its name – wasn’t a nonprofit. Instead, it was a business venture. The enterprise was funded by offering shares to investors who, in return, would make money while doing good. Under its original mission, it was like an 18th century version of today’s socially responsible investing, or “<a href="https://theconversation.com/sustainable-investment-is-it-worth-the-hype-heres-what-you-need-to-know-182533">sustainable investment funds</a>.” </p>
<h2>Raiding the fund</h2>
<p>In 1725, the Charitable Corporation diverted from its original mission when a new board of directors took over. </p>
<p>These men turned the corporation into their own piggy bank, taking money from it to buy shares and prop up their other companies. At the same time, the company’s employees began to engage in fraud: Safety checks ceased, books were kept irregularly and pledges went unrecorded. </p>
<p>Investigators would ultimately find that <a href="https://www.worldcat.org/title/642348549">£400,000</a> or more in capital was missing – roughly $108 million in today’s U.S. dollars. </p>
<p>In the autumn of 1731, rumors began to circulate about the solvency of the Charitable Corporation. The warehouse keeper at the time, <a href="https://www.thegazette.co.uk/London/issue/7034/page/1">John Thomson</a>, who was in charge of all loans and pledges but also in league with the five fraudulent directors, hid the company’s books and fled the country. </p>
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<a href="https://images.theconversation.com/files/502026/original/file-20221220-26-87nitv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Print of man chopping down tree with people hanging from the branches." src="https://images.theconversation.com/files/502026/original/file-20221220-26-87nitv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/502026/original/file-20221220-26-87nitv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1016&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502026/original/file-20221220-26-87nitv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1016&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502026/original/file-20221220-26-87nitv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1016&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502026/original/file-20221220-26-87nitv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1276&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502026/original/file-20221220-26-87nitv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1276&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502026/original/file-20221220-26-87nitv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1276&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">‘Let 'em be ruined so we are made,’ a man says in a 1734 satirical print criticizing the Charitable Corporation and its ties to government.</span>
<span class="attribution"><a class="source" href="https://www.britishmuseum.org/collection/object/P_1868-0808-3573">© The Trustees of the British Museum</a></span>
</figcaption>
</figure>
<p>At the shareholders’ quarterly meeting, they found that money, pledges and accounts had all gone missing. At this point, the proprietors of the Charitable Corporation stock appealed to the British Parliament for redress. One-third of those who petitioned were women, a proportion that equaled <a href="https://academic.oup.com/book/5620">the percentage of women who held shares</a> in the Charitable Corporation. </p>
<p>Many women were drawn to the corporation because of its public mission in providing small loans to working people. It’s also possible that they had been intentionally targeted for fraud. </p>
<p>The <a href="https://www.google.com/books/edition/The_Report_with_the_Appendix_from_the_Co/aodhAAAAcAAJ?hl=en&gbpv=1">parliamentary investigation</a> led to various charges being leveled against both managers and employees of the Charitable Corporation. Many of them were forced to appear before Parliament and were arrested if they did not. The managers and employees deemed most responsible for the 1732 fraud, such as <a href="https://www.google.com/books/edition/A_True_and_Exact_Particular_and_Inventor/AvBbAAAAQAAJ?hl=en&gbpv=0">William Burroughs</a>, had their assets seized and inventoried in order to help pay back the shareholder losses. </p>
<p>Bankruptcy proceedings were started against the banker and broker, George Robinson, and the warehouse keeper, Thomson. Both Sir Robert Sutton and <a href="https://www.historyofparliamentonline.org/volume/1715-1754/member/grant-archibald-1696-1778">Sir Archibald Grant</a> were expelled as members of the House of Commons, with Grant being prevented from leaving the country and Sutton ultimately prosecuted in several courts.</p>
<p>In the end, the shareholders received a partial government bailout – Parliament authorized a <a href="https://www.british-history.ac.uk/commons-hist-proceedings/vol7/pp375-401">lottery</a> that reimbursed only 40% of what the corporation’s creditors had lost.</p>
<h2>The risks of concentrated power</h2>
<p>There are several key characteristics that stand out in the collapses of both the Charitable Corporation and FTX. Both companies were offering something new or venturing into a new sector. In the former’s case, it was microloans. In FTX’s case, it was cryptocurrency. </p>
<p>Meanwhile, the management of both ventures was centralized in the hands of just a few people. The Charitable Corporation got into trouble when it reduced its directors from 12 to five and when it consolidated most of its loan business in the hands of one employee – namely, Thomson. FTX’s example is even more extreme, with founder Sam Bankman-Fried <a href="https://www.theguardian.com/technology/2022/nov/22/ftx-delaware-bankruptcy-court-cryptocurrency-sam-bankman-fried">calling all the shots</a>. </p>
<p>In both cases, the key fraud was using the assets of one company to prop up another company managed by the same people. For example, in 1732, the corporation’s directors bought stock in the <a href="https://archive.org/details/yorkbuildingsco00murrgoog">York Buildings Company</a>, in which many of them were also involved. They hoped to juice stock prices. When that didn’t happen, they realized they couldn’t cover what they had taken out of the Charitable Corporation’s funds. </p>
<p>Fast forward nearly 300 years, and a similar story seems to have played out. Bankman-Fried allegedly <a href="https://www.cnbc.com/2022/12/18/how-sam-bankman-fried-ran-8-billion-fraud-government-prosecutors.html">took money</a> out his customer accounts in FTX to cover his cryptocurrency trading firm, Alameda Research.</p>
<p>News of both frauds also came as a surprise, with little advance warning. Part of this is due to the ways in which managers were well respected and well connected to both politicians and the financial world. Few public figures mistrusted them, and this proved to be a useful screen for deceit. </p>
<p>I would also argue that in both cases the company’s connection to philanthropy lent it another level of cover. The Charitable Corporation’s very name announced its altruism. And even after the scandal subsided, commentators pointed out that the original business of microlending was useful. FTX’s founder Bankman-Fried is an advocate of <a href="https://theconversation.com/ftx-bankruptcy-is-bad-news-for-the-charities-that-crypto-mogul-sam-bankman-fried-generously-supported-194615">effective altruism</a> and has argued that it was useful for him and his companies to make lots of money so he could give it away to what he deemed effective causes.</p>
<p>After the Charitable Corporation’s collapse in 1732, Parliament didn’t institute any regulation that would prevent such a fraud from happening again. </p>
<p>A tradition of loose oversight and regulations has been the hallmark of Anglo-American capitalism. If the response to the 2008 financial crash is any indication of what will come in the wake of FTX’s collapse, it’s possible that some bad actors, like Bankman-Fried, will be punished. But any <a href="https://www.cnbc.com/2022/12/09/uk-announces-major-overhaul-of-its-financial-sector-in-attempt-to-spur-growth.html">regulation will be undone at the first opportunity</a> – or never put in place to begin with.</p><img src="https://counter.theconversation.com/content/196729/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amy Froide receives funding from the Henry E. Huntington Library. </span></em></p>
In the Charitable Corporation Scandal, a group of politically connected directors leveraged the company’s altruistic image to attract investors – before raiding the funds to prop up other ventures.
Amy Froide, Professor of History, University of Maryland, Baltimore County
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/184722
2022-06-22T14:39:47Z
2022-06-22T14:39:47Z
How to combat the unethical and costly use of deepfakes
<figure><img src="https://images.theconversation.com/files/470014/original/file-20220621-12-b1wwi2.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4187%2C2779&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The use of deepfakes by criminals is on the rise, costing individuals and organizations billions of dollars in losses annually.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/how-to-combat-the-unethical-and-costly-use-of-deepfakes" width="100%" height="400"></iframe>
<p>Deepfakes are video, audio and image content <a href="https://www.businessinsider.com/what-is-deepfake">generated by artificial intelligence</a>. This technology can produce false images, videos or sounds of a person, place or event that appear authentic. </p>
<p>In 2018, there were approximately <a href="https://sensity.ai/reports/">14,698 deepfake videos circulating online</a>. Since then, the number has soared through the popularity of deepfake apps like DeepFaceLab, Zao, FaceApp and Wombo.</p>
<p>Deepfakes are used in several industries, including <a href="https://www.cinemablend.com/news/2559935/rogue-one-deepfake-makes-star-wars-leia-and-grand-moff-tarkin-look-even-more-lifelike">filmmaking</a>, <a href="https://www.nssmag.com/en/sports/28215/deepfake-estetica-fifa">video games</a>, <a href="https://www.voguebusiness.com/companies/how-deepfakes-could-change-fashion-advertising-influencer-marketing">fashion</a> and <a href="https://www.adnews.com.au/news/add-to-cart-why-deepfakes-are-good-for-retail">e-commerce</a>. </p>
<p>However, the malicious and unethical use of deepfakes can harm people. According to research by cybersecurity firm Trend Micro, the “<a href="https://documents.trendmicro.com/assets/rpt/rpt-the-new-norm-trend-micro-security-predictions-for-2020.pdf">rise of deepfakes raises concern</a>: It inevitably moves from creating fake celebrity pornographic videos to manipulating company employees and procedures.” </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-use-of-deepfakes-can-sow-doubt-creating-confusion-and-distrust-in-viewers-182108">The use of deepfakes can sow doubt, creating confusion and distrust in viewers</a>
</strong>
</em>
</p>
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<h2>Increased vulnerabilities</h2>
<p>Our research found that organizations are increasingly vulnerable to this technology and <a href="https://doi.org/10.1108/JFC-04-2022-0090">the costs of this type of fraud can be high</a>. We focused on two public case studies using deepfakes that targeted CEOs and, to date, have estimated losses amounting to US$243,000 and US$35 million respectively. </p>
<p>The first case of fraud occurred at a British energy firm in March 2019. The chief executive officer received an urgent call from his boss, the chief executive of the firm’s German parent company, asking him to transfer funds to a Hungarian supplier within an hour. The fraud was presumably carried out using a commercial voice-generating software. </p>
<p>The second case was identified in Hong Kong. In January 2020, a branch manager received a call from someone whose voice sounded like that of the director of the company. In addition to the call, the branch manager received several emails that he believed were from the director. The phone call and the emails concerned the acquisition of another company. The fraudster used deep voice technology to simulate the director’s voice. </p>
<p>In both cases, the firms were targeted for payment fraud using deepfake technology to mimic individuals’ voices. The earlier case was less convincing than the second, as it only used voice phishing.</p>
<h2>Opportunities and threats</h2>
<p>Forensic accounting involves “the application of specialized knowledge and investigative skills possessed by [certified public accountants] to <a href="https://us.aicpa.org/interestareas/forensicandvaluation/resources/forensic-accounting">collect, analyze and evaluate evidential matter and to interpret and communicate findings</a> in the courtroom, boardroom, or other legal or administrative venue.” </p>
<p>Forensic accountants and fraud examiners — who investigate allegations of fraud — continue to see a rise in deepfake fraud schemes. </p>
<p>One type of deepfake fraud schemes is known as <a href="https://www.forbes.com/advisor/credit-score/what-is-synthetic-fraud/">synthetic identity fraud</a>, where a fraudster can create a new identity and target financial institutions. For instance, deepfakes enable fraudsters to open bank accounts under false identities. They use these fabricated identities to develop a trust relationship with the financial institution in order to defraud them afterwards. These fraudulent identities can also be used in money laundering.</p>
<p>Websites and applications that provide access to deepfake technologies have made identity fraud easier; <a href="https://this-person-does-not-exist.com/en">This Person Does Not Exist</a>, for example, uses AI to generate random faces. Neil Dubord, chief of the police department in Delta, B.C., wrote that “synthetic identity fraud is reportedly the fastest-growing type of financial crime, costing online lenders <a href="https://www.pymnts.com/identity-theft/2022/synthetic-identity-fraud-costs-businesses-billions-each-year-data-shows/">more than $6 billion annually</a>.”</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/470016/original/file-20220621-11-31la3l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="a digital magnifying glass sits on a paper with charts, a pair of glasses and a pen are in the background" src="https://images.theconversation.com/files/470016/original/file-20220621-11-31la3l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/470016/original/file-20220621-11-31la3l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/470016/original/file-20220621-11-31la3l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/470016/original/file-20220621-11-31la3l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/470016/original/file-20220621-11-31la3l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/470016/original/file-20220621-11-31la3l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/470016/original/file-20220621-11-31la3l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Forensic accounting helps trace the impacts of fraud.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
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<h2>Large datasets</h2>
<p>Deepfakes can enhance traditional fraud schemes, like payment fraud, email hacking or money laundering. Cybercriminals can use deepfakes to access valuable assets and data. More specifically, they can use deepfakes to gain unauthorized access to large databases of personal information. </p>
<p>Combined with social media platforms like Facebook, deepfakes could damage the reputation of an employee, trigger decreases in share values and undermine confidence in a company. </p>
<p>Forensic accountants and fraud investigator need to recognize red flags related to deepfakes and develop anti-fraud mechanisms to prevent these schemes and reduce the associated loss. They should also be able to evaluate and quantify the loss due to a deepfake attack.</p>
<p>In our case studies, deepfakes used the voices of senior management to instruct employees to transfer money. The success of these schemes relied on employees being unaware of the associated red flags. These may include secrecy (the employee is requested to not disclose the request to others) or urgency (the employee is needed to take immediate action).</p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/pkF3m5wVUYI?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Al Jazeera investigates the growing threat of deepfakes.</span></figcaption>
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<h2>Curbing deepfakes</h2>
<p>Some simple strategies can be deployed to combat the malicious use of deepfakes:</p>
<ul>
<li><p>Encourage open communication: speaking and consulting with colleagues and others about anything that appears suspicious are effective tools to prevent fraud schemes.</p></li>
<li><p>Learn how to assess authenticity: for example, ending a suspicious call and calling back the number to assess the person’s authenticity.</p></li>
<li><p>Pause without reacting quickly to unusual requests.</p></li>
<li><p>Keep up-to-date with new technologies that helps detect deepfakes.</p></li>
<li><p>Enhance certain controls and assessment to verify client identity in financial institutions, such as <a href="https://www.investopedia.com/terms/k/knowyourclient.asp">Know Your Customer</a>.</p></li>
<li><p>Provide employee training and education on deepfake frauds. </p></li>
</ul>
<p>Cybercriminals may use deepfakes to make their schemes appear more realistic and trustworthy. These increasingly sophisticated schemes have harmful financial and other consequences for people and organizations. </p>
<p>Fraud examiners, cybersecurity experts, authorities and forensic accountants may need to fight fire with fire, and employ AI-based techniques to counter and detect fictitious media.</p><img src="https://counter.theconversation.com/content/184722/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
To combat the rise in deepfakes used in fraud, employees and investigators need to be aware of the threats involved.
Nadia Smaili, Professor in Accounting (forensic accounting), Université du Québec à Montréal (UQAM)
Audrey de Rancourt-Raymond, Assistant researcher, Université du Québec à Montréal (UQAM)
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/175698
2022-01-26T17:07:06Z
2022-01-26T17:07:06Z
Treasury minister quits over COVID loan fraud: what we know so far about the unfolding scandal
<p>Conservative Treasury minister and Cabinet Office minister <a href="https://www.bbc.co.uk/news/uk-politics-60117513">Lord Agnew</a> has resigned from both of his posts with a <a href="https://www.youtube.com/watch?v=TzDCmrWOr5Y">scathing rebuke</a> to his government colleagues over COVID business loan fraud. His dramatic exit from the chamber was an unusual occurrence in the normally sedate House of Lords, which rarely sees ministerial resignations.</p>
<p>Lord Agnew’s resignation stems from his dissatisfaction with how the Bounce Back Loan Scheme has been handled by government, the <a href="https://www.british-business-bank.co.uk/">British Business Bank</a>, and lenders – namely, the main high street banks. He called the government’s oversight of the scheme “desperately inadequate … and nothing less than woeful”. </p>
<p>The scheme was launched in May 2020 as part of the government’s package of support for businesses during the early days of the pandemic. Over an 11-month period, 1.5 million loans lent a total of £47 billion to (supposedly) eligible businesses. But after the close of the scheme in March 2021, <a href="https://theconversation.com/coronavirus-business-loans-some-directors-may-have-defrauded-billions-from-uk-taxpayers-165024">it was disclosed</a> that <a href="https://www.liverpool.ac.uk/law-and-social-justice/blog/the-biggest-write-off-in-corporate-history/">billions of pounds</a> worth of loans might not be paid back.</p>
<p>Estimates on default levels vary. A House of Commons committee in June of that year projected that defaults on loans could total <a href="https://committees.parliament.uk/publications/6469/documents/70574/default/">£27 billion</a>. And in December, the National Audit Office projected <a href="https://www.nao.org.uk/wp-content/uploads/2021/12/The-Bounce-Back-Loan-Scheme-an-update.pdf">£17 billion</a>. </p>
<p>While most of the written-off debt may be from those genuinely unable to repay, a not-insignificant chunk is due to fraud. Agnew accused the government of giving loans to hundreds of companies that were not trading at the time. In March 2021, the department for <a href="https://www.gov.uk/government/organisations/department-for-business-energy-and-industrial-strategy">Business, Energy and Industrial Strategy</a> put the potential bad debt figure due to fraud at £4.9 billion.</p>
<p>No 10’s response to Lord Agnew’s resignation was that the government has recovered £500 million so far, with the expectation of recovering an additional <a href="https://www.bbc.co.uk/news/uk-politics-60117513">£1 billion</a>. But against these default figures, that recovery rate will be infuriatingly low for hard-pressed taxpayers.</p>
<p>The government’s challenge is that lenders have a 100% state guarantee for any nonpayment of bounce back loans. Bank loans are not normally underwritten by the state. This guarantee explains why banks may have lent without adequate safeguards and why the default projections are so high. Rishi Sunak, as chancellor, will need to revisit the terms of the state guarantee to ensure lenders acted within the scheme criteria, if he is to limit the amount of guarantees the Treasury will need to pay.</p>
<h2>Recovering the money</h2>
<p>The government has powerful tools at its disposal both to try and recover loans that are not paid back and to punish wrongdoing, though some loans may be lost forever due to a lack of resources. </p>
<p>There are <a href="https://www.legislation.gov.uk/ukpga/1986/46/section/6">civil sanctions</a> that might worry a director whose company is in default. <a href="https://www.legislation.gov.uk/ukpga/1986/46/section/6">Director disqualification</a> exists to protect the public from directors who have behaved in an unfit way, such as by dissolving their company to evade debts or inappropriately using loan funds. As part of this regime, the government’s <a href="https://www.gov.uk/government/organisations/insolvency-service">Insolvency Service</a> can also ask the courts to order directors to pay compensation from their own pocket. </p>
<p>In January 2022 the Insolvency Service successfully obtained disqualification orders totalling 21 years against <a href="https://www.gov.uk/government/news/bans-for-two-directors-who-abused-bounce-back-loan-scheme">Yorkshire-based businessmen</a> who abused the loan scheme by fraudulently inflating the company’s turnover and making payments from company funds to relatives. Compensation orders may follow for the directors, and those in bankruptcy may also have the <a href="https://www.gov.uk/government/news/insolvency-service-cracks-down-on-bounce-back-loan-abusers">relevant restrictions</a> extended beyond the usual 12 months so that they can’t, for example, obtain credit for a longer period.</p>
<p>In another recent case, the Insolvency Service obtained director disqualifications against three directors who had <a href="https://www.gov.uk/government/news/insolvency-service-cracks-down-on-bounce-back-loan-abusers%5D">inappropriately used</a> £100,000 of bounce back loans to make payments to specific creditors. Once disqualified, an individual cannot act as a company director from anywhere between two and 15 years, depending on what the court says. </p>
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</figure>
<p>There are also potential criminal sanctions for company directors, particularly where fraud or other offences can be established. Law enforcement agencies including the <a href="https://nationalcrimeagency.gov.uk/">National Crime Agency</a> and the <a href="https://www.natis.police.uk/newsagena.html">National Investigation Service</a> are already investigating the most egregious fraud cases. </p>
<p>In one <a href="https://www.dailymail.co.uk/news/article-10427189/Outraged-judge-calls-investigation-car-thieving-gang-got-145-000-Covid-bounce-loans.html">headline case</a>, leaders of an organised crime group successfully applied for loans. In another, two men have been <a href="https://nationalcrimeagency.gov.uk/news/international-fraudsters-ran-70m-money-laundering-scheme?highlight=WyJib3VuY2UiLCJiYWNrIiwiYmFja2VkIiwiYmFja2luZyIsImJhY2tzIiwiYmFjaycuIiwibG9hbnMiLCJsb2FuIiwibG9hbmVkIiwiYm91bmNlIGJhY2siLCJib3VuY2UgYmFjayBsb2FucyIsImJhY2sgbG9hbnMiXQ==">jailed for</a> a total of 33 years for their part in a £70 million international money laundering network, £10 million of which was claimed through the loan scheme. </p>
<p>Further arrests for fraud and money laundering offences relating to the scheme have occurred in <a href="https://www.natis.police.uk/newssa.html">London</a>, <a href="https://www.natis.police.uk/newsal.html">Yorkshire</a>, <a href="https://www.natis.police.uk/newsik.html">Humberside</a>, <a href="https://www.natis.police.uk/newsar.html">Wiltshire</a>, and Heathrow Airport, where the provision of false information to obtain loans led to an arrest for alleged <a href="https://www.natis.police.uk/brisbjan.html">money laundering and fraud</a>. The cases are yet to come to trial but the defendants can expect long sentences if convicted. </p>
<h2>Fault and default</h2>
<p>The uproar over the results of the bounce back loan scheme raises one important question – who is responsible? <a href="https://www.nao.org.uk/wp-content/uploads/2021/12/The-Bounce-Back-Loan-Scheme-an-update.pdf">Evidence suggests</a> that banks lent too generously, or with inadequate checks, safe in the knowledge that they were covered by the state guarantee if debtor companies defaulted. Responsibility also sits with company directors who made highly dubious loan applications. Deliberately taking out bounce back loans with no intention of repayment is ultimately a fraud on the taxpayer. </p>
<p>We have to be careful to distinguish between this type of unfit director and those who applied for support in the honest belief that it would help their company survive through this difficult and unprecedented time period, but were ultimately unable to repay the loan. </p>
<p>Unfortunately, the size of the default rate, and the convictions that are starting to emerge, paint a picture of widespread misuse of the scheme. Lord Agnew’s resignation may add further impetus to taxpayer and creditor recoveries.</p><img src="https://counter.theconversation.com/content/175698/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Tribe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
The government has civil and criminal tools to try and recover billions of pounds.
John Tribe, Senior Lecturer in Law, University of Liverpool
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/163148
2021-07-21T11:33:21Z
2021-07-21T11:33:21Z
When companies massage the books, the environment takes a hit
<figure><img src="https://images.theconversation.com/files/411918/original/file-20210719-15-13nmwff.jpg?ixlib=rb-1.1.0&rect=0%2C890%2C5000%2C2432&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A woman uses a scarf to cover her mouth to protect against air pollution as she walks on street in Beijing in 2016. </span> <span class="attribution"><span class="source"> (AP Photo/Andy Wong) </span></span></figcaption></figure><p><a href="https://www.investopedia.com/terms/e/earnings-management.asp">Managing earnings</a> involves the manipulation of financial reporting by publicly traded companies in order to misrepresent how well they’re really doing. Companies might insert a low-ball estimate of bad debt or delay the announcement of a <a href="https://marketbusinessnews.com/financial-glossary/capital-project/">capital project</a> — anything that can help a struggling public company report an extra cent or two of earnings per share in its quarterly or annual statement and avoid negative buzz and a <a href="https://www.investopedia.com/terms/s/sell-off.asp">stock sell-off</a>.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/411974/original/file-20210719-15-10tmaeu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Under Armour hoodies hang on a rack." src="https://images.theconversation.com/files/411974/original/file-20210719-15-10tmaeu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/411974/original/file-20210719-15-10tmaeu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/411974/original/file-20210719-15-10tmaeu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/411974/original/file-20210719-15-10tmaeu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/411974/original/file-20210719-15-10tmaeu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/411974/original/file-20210719-15-10tmaeu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/411974/original/file-20210719-15-10tmaeu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Under Armour clothes are displayed at a California store. The company settled with the SEC to pay $9 million in fines related to misleading its revenue growth to investors.</span>
<span class="attribution"><span class="source">(AP Photo/Jeff Chiu)</span></span>
</figcaption>
</figure>
<p>Lots of firms engage in it; rarely are they punished. A recent exception was Under Armour, the American sports equipment manufacturer that recently <a href="https://www.sec.gov/news/press-release/2021-78">settled an enforcement action</a> with the United States Securities and Exchange Commission.</p>
<p>Earnings management may be a form of financial fraud, but there are plenty of defenders who say accounting standards <a href="https://sfmagazine.com/post-entry/november-2018-the-ethicality-of-earnings-management/">allow for managerial discretion</a> in reporting earnings. Besides, when firms manipulate their books, aren’t they hurting themselves more than anyone else? </p>
<p>It’s this seeming lack of an identifiable victim that has led many accounting professionals and researchers to conclude that it’s no big deal. New research, however, reveals a darker story.</p>
<p>Two recent studies show how a company’s obsession in meeting earnings expectations can victimize vulnerable employees. One documented <a href="https://doi.org/10.1016/j.jacceco.2016.12.002">higher workplace injury and illness rates</a> in firms that meet or just beat analyst forecasts — the result of increases in employee workloads and out-of-the-ordinary reductions of discretionary expenses. A second study connected earnings management to <a href="https://dx.doi.org/10.2139/ssrn.3307594">corporate wage theft</a>, which happens when firms fail to pay employees for overtime or force them to under-report the number of hours worked.</p>
<h2>Increase in air pollution</h2>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3800156">A new study</a> we conducted with Hongtao Shen and Yang Zhao of Jinan University in China and Zheng Liu, a doctoral student at Smith School of Business at Queen’s University, showed an even wider fallout from earnings management — an increase in air pollution, with <a href="https://doi.org/10.1016/j.jpubeco.2021.104440">long-term health consequences</a>.</p>
<p>We based our study on a hunch that pollution reduction costs would be a prime target for struggling firms feeling pressure to meet earnings targets. Most emission reduction expenditures are variable costs that can be reduced by switching off abatement technology, such as <a href="https://cfpub.epa.gov/si/si_public_record_Report.cfm?Lab=NRMRL&dirEntryId=65468">sulphur dioxide scrubbers</a>, and switching them to full power when inspections are imminent.</p>
<figure class="align-center ">
<img alt="A man wearing a mask walks in smog." src="https://images.theconversation.com/files/411916/original/file-20210719-23-7iuvl0.jpg?ixlib=rb-1.1.0&rect=1040%2C0%2C3952%2C3315&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/411916/original/file-20210719-23-7iuvl0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/411916/original/file-20210719-23-7iuvl0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/411916/original/file-20210719-23-7iuvl0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/411916/original/file-20210719-23-7iuvl0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/411916/original/file-20210719-23-7iuvl0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/411916/original/file-20210719-23-7iuvl0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A man wearing a mask for protection against air pollution walks in Beijing as the capital of China is shrouded by heavy smog in 2016. Research shows manipulating earnings reports in China resulted in an increase in air pollution.</span>
<span class="attribution"><span class="source">(AP Photo/Andy Wong)</span></span>
</figcaption>
</figure>
<p>From the perspective of a company looking for a quick fix, cutting pollution abatement expenses is often a better alternative than cutting <a href="https://opsway.com/blog/understanding-why-rd-so-important">research and development</a> or advertising, which could damage its mid- or long-term interests. By switching off the scrubbers, the firm passes on the long-term costs of a dirtier environment to the community where it operates.</p>
<p>We focused our study on a selection of publicly traded manufacturers in China, where there have been a <a href="https://www.nationalgeographic.com/science/article/china-air-pollution-solutions-environment-tangshan">variety of efforts</a> to control sulphur dioxide emissions that cause acid rain and air pollution. </p>
<p>To identify those firms feeling pressured to engage in earnings management, we turned to previous research that showed companies just meeting or exceeding analyst forecasts as prime suspects for engaging in accounting manipulation.</p>
<p>When we analyzed the data, they told a convincing story. Manufacturers that just met or beat analyst earnings forecasts had higher-intensity sulphur dioxide emissions — they released, on average, 0.26 kilograms more sulphur dioxide per 1,000 CNY (Chinese yuan renminbi) of output, almost 27 per cent higher than the average for emission-releasing establishments.</p>
<h2>Regulations were weak</h2>
<p>This unethical corporate behaviour was most evident when environmental regulation and monitoring were weak. In China, <a href="https://www.mondaq.com/china/clean-air-pollution/955486/china39s-evolving-environmental-protection-laws">the environmental regulator is a local agency dependent on local government</a>, which in turn depends on tax revenue from companies in its jurisdiction. The study revealed that suspect firms that were key contributors to the local economy emitted more sulphur dioxide. The same held true for state-owned enterprises aligned with the central government and protected from environmental monitoring and enforcement.</p>
<p>The opposite was also true — companies were less likely to surreptitiously cut back on their abatement expenses when monitoring was tight and regulations were enforced.</p>
<p>This was evident among firms located in designated acid-rain control zones and in cities that hosted events like the <a href="https://chicagopolicyreview.org/2016/02/12/the-2008-beijing-olympic-games-spillover-effects-on-air-quality-and-health/">2008 Beijing Summer Olympics</a> — occasions when China increased environmental monitoring in order to polish its image on the world stage. This was also evident among firms mandated to disclose data relating to corporate social responsibility.</p>
<figure class="align-center ">
<img alt="Fireworks explode over a stadium." src="https://images.theconversation.com/files/411970/original/file-20210719-15-97btjc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/411970/original/file-20210719-15-97btjc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/411970/original/file-20210719-15-97btjc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/411970/original/file-20210719-15-97btjc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/411970/original/file-20210719-15-97btjc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/411970/original/file-20210719-15-97btjc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/411970/original/file-20210719-15-97btjc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Fireworks explode over the National Stadium during the opening ceremony for the Beijing 2008 Olympics in Beijing.</span>
<span class="attribution"><span class="source">(AP Photo/Itsuo Inouye)</span></span>
</figcaption>
</figure>
<p>Our findings and those of other studies carry a message for directors of public companies who oversee their firms’ financial reporting. <a href="https://doi.org/10.1287/orsc.2016.1056">Research shows</a> that companies with more long-term-oriented investors and CEOs with incentives that reward a longer-term perspective are less likely to engage in any sort of financial sleight of hand. To some extent, that means earnings management can by mitigated by people management.</p>
<p>It’s time that the accounting profession, researchers and capital market regulators take earnings management more seriously. We need to know what companies are doing just to find a few pennies of earnings per share to meet quarterly or annual targets — and who ends up paying for such practices.</p><img src="https://counter.theconversation.com/content/163148/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Earnings management is one of those genteel business terms that looks a lot less innocent the more you study it.
Michael Welker, Professor, Financial Accounting, Queen's University, Ontario
Ning Zhang, Associate Professor, Financial Accounting, Queen's University, Ontario
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/142598
2020-07-15T13:15:50Z
2020-07-15T13:15:50Z
Audit keeps failing – here’s why a fundamental change is needed
<figure><img src="https://images.theconversation.com/files/347643/original/file-20200715-17-7vk06i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">EY's auditors are under fire for failing to spot Wirecard's missing €1.9 billion sooner.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-19-february-2016-ernst-383643241">James W Copeland / Shutterstock.com</a></span></figcaption></figure><p>A massive shakeup of the UK’s audit industry is on the cards. The Big Four, which audit all of the FTSE 100 and 21 of the FTSE 250, have been told by the accounting regulator <a href="https://www.ft.com/content/4464e0a3-9ba2-47d2-9f85-3f2912a22f25">to separate their auditing practices by 2024</a>. It follows the collapse of Wirecard, a payments firm which recently admitted that €1.9 billion of the cash on its books <a href="https://www.reuters.com/article/us-wirecard-accounts/germanys-beleaguered-wirecard-to-proceed-with-business-after-insolvency-idUSKBN23Y0QQ">probably never existed</a>.</p>
<p>But change has been a long time coming. The frequency with which companies fail – seemingly without any warning signs – has grown in recent years and Wirecard is merely the latest example. <a href="https://www.accountancyage.com/2018/05/16/auditors-in-the-dock-over-carillion-as-report-calls-for-big-four-break-up/">Carillion</a>, <a href="https://www.ft.com/content/89e05efe-6ed0-11e8-92d3-6c13e5c92914">BHS</a>, <a href="https://www.ft.com/content/3bba8a46-f4cc-11e9-b018-3ef8794b17c6">Thomas Cook</a>, <a href="https://www.theguardian.com/business/2019/jul/10/watchdog-finds-work-of-patisserie-valerie-auditor-unacceptable">Patisserie Valerie</a>, and many other companies were given clean bills of financial health by their auditors before collapsing. </p>
<p>We believe that these many failings highlight how the auditing industry is <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3101057">not fit for purpose</a>. The perception of the public is that it is the job of auditors to go over a company’s books and make sure everything is in order. Surely they should be able to spot a looming disaster or better raise concerns about the direction a company is travelling in? Yet so often they fail.</p>
<p>Separating the Big Four’s auditing arms from the rest of their business is a welcome development. <a href="https://www.researchgate.net/publication/325149300_How_the_Big_4_got_big_Audit_culture_and_the_metamorphosis_of_international_accountancy_firms">Research</a> has <a href="https://www.researchgate.net/publication/327039139_The_auditor_to_client_revolving_door_A_structured_literature_review">repeatedly shown</a> how problematic it is that these firms audit the same companies that they give financial advice to through their wider consulting and tax divisions.</p>
<p>But this is not enough in the fight against financial deception. First, giving the Big Four four years to separate their audit practices is concerning. Fraudulent financial reporting is <a href="https://www.acfe.com/report-to-the-nations/2020/">a huge problem</a> – and likely to grow as the coronavirus-induced recession begins to bite – and this time frame is enough for a worrying number of businesses to fail. But, more fundamentally, there needs to be a change to the approach that auditors take. </p>
<h2>‘Serious and serial failures’</h2>
<p>EY – whose latest audit of Wirecard’s accounts revealed the missing funds – <a href="https://www.bloombergquint.com/business/wirecard-auditors-say-elaborate-fraud-led-to-missing-billions">said</a> it was “an elaborate and sophisticated global fraud” and that EY had been provided false documentation. This defence is revealing of issues in the profession as a whole. </p>
<figure class="align-center ">
<img alt="Payments firm, Wirecard's headquarters in Germany." src="https://images.theconversation.com/files/347644/original/file-20200715-37-1jwudgh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/347644/original/file-20200715-37-1jwudgh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/347644/original/file-20200715-37-1jwudgh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/347644/original/file-20200715-37-1jwudgh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/347644/original/file-20200715-37-1jwudgh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/347644/original/file-20200715-37-1jwudgh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/347644/original/file-20200715-37-1jwudgh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Payments firm Wirecard filed for insolvency after admitting that €1.9 billion of cash probably never existed.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/aschheim-bavaria-germany-april-10-2020-1701338905">Rico Markus/Shutterstock</a></span>
</figcaption>
</figure>
<p>Critics say EY should have done more <a href="https://www.ft.com/content/a9deb987-df70-4a72-bd41-47ed8942e83b">to detect the fraud</a>. But the prevailing wisdom in the auditing profession is that auditors are not expected to go looking for fraud and they are ultimately not responsible for detecting it. The <a href="https://www.frc.org.uk/getattachment/94ebc178-98bc-4675-a626-327b11773bea/ISA-(UK)-240_Revised-June-2016_Updated-January-2020_final-With-Covers.pdf">International Standards on Auditing</a>, which sets out global standards for the profession, places the responsibility for the prevention and detection of fraud solely on a company’s managers and directors – not its auditors. </p>
<p>Clearly the current system is not working. The number of fines for negligence in failed audits speaks for itself, with Big Four firms hit with £16.5 million in fines <a href="https://www.telegraph.co.uk/business/2019/12/29/revealed-half-audit-fines-2019-went-one-firm/">in 2019 alone</a>. </p>
<p>PwC was fined <a href="https://www.ft.com/content/8e13a416-8dcb-11e9-a24d-b42f641eca37">£4.6 million in June 2019</a> for “serious lack of competence” when inspecting the financial statements of IT services firm Redcentric. This followed a <a href="https://www.ft.com/content/89e05efe-6ed0-11e8-92d3-6c13e5c92914">£6.5 million fine</a> in June 2018 for misconduct in its audit of department store BHS. KPMG was <a href="https://www.frc.org.uk/news/april-2019/sanctions-against-kpmg-and-others-in-relation-to-e">fined £6 million in 2019</a> for misconduct in relation to the audit of automobile insurer Equity Syndicate Management Limited. Deloitte has just been handed a <a href="https://www.ft.com/content/9b8bc2e9-2a35-40d6-80fd-b7788fe31017">record £15 million fine</a> for “serious and serial failures” in its audits of former FTSE 100 technology group Autonomy.</p>
<h2>Reform roadmap</h2>
<p>Despite the evident problems with the auditing profession, the UK government has been slow to make any serious changes to the way it is regulated or what is expected of auditors. A major review, known as the <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/852960/brydon-review-final-report.pdf">Brydon report</a>, was commissioned in 2018 but little has been done to act on the proposals it made. </p>
<p>A good starting point is to put the onus on auditors to detect fraud. Auditors, the report said, should be suspicious and “endeavour to detect material fraud in all reasonable ways”. This is very different to the current soft approach.</p>
<p>We believe that auditors should accept full responsibility for detecting fraud in financial statements. Abdicating this responsibility to management negates the very purpose of audit in the financial reporting process.</p>
<p>Once the mandate of auditors has changed, this will shape how auditors are trained. Currently the emphasis is on simply identifying any departures from accounting standards. But they need to go beyond this and adopt <a href="http://shura.shu.ac.uk/25470/">forensic accounting procedures</a>. </p>
<p>This involves a thorough examination of financial information, taking an investigative approach and analysing information as if it would be held up in a court of law. Embedding forensic accounting into their approach will likely save auditors from some of the fines they have been receiving, as they can clearly show what they did, if need be. </p>
<p>Along with separating audit from the Big Four and a better regulator, this is required to restore public trust in the financial reporting process and prevent the seemingly sudden collapse of more businesses – something that is hugely important for the success of any business, as well as the wider economy.</p><img src="https://counter.theconversation.com/content/142598/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Big Four firms were hit with £16.5 million in fines for audit failings in 2019 alone.
Ifedapo Francis Awolowo, Lecturer in Accounting, Sheffield Hallam University
Nigel Garrow, Professor, Sheffield Business School, Sheffield Hallam University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/141289
2020-07-06T02:28:52Z
2020-07-06T02:28:52Z
$2.5 billion lost over a decade: ‘Nigerian princes’ lose their sheen, but scams are on the rise
<figure><img src="https://images.theconversation.com/files/345461/original/file-20200703-33926-nxbl9g.jpg?ixlib=rb-1.1.0&rect=173%2C41%2C5329%2C3621&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Last year, Australians reported more than A$634 million lost to fraud, a significant jump from $489.7 million the year before.</p>
<p>The Australian Competition and Consumer Commission (ACCC) has released its latest annual <a href="https://www.accc.gov.au/publications/targeting-scams-report-on-scam-activity/targeting-scams-2019-a-review-of-scam-activity-since-2009">Targeting Scams</a> report.</p>
<p>But despite increased awareness, scam alerts and targeted education campaigns, more Australians are being targeted than ever before. </p>
<p>With all the technological tools we have, why does fraud continue to be so pervasive? And how can the damage be reduced?</p>
<h2>Latest key findings</h2>
<p>According to the ACCC’s report, “<a href="https://eprints.qut.edu.au/200621/">business email compromise</a>” fraud rose to dominance in 2019. </p>
<p>At $132 million, it became the highest category of financial loss reported – the first time this has happened. This usually involves using <a href="https://www.scamwatch.gov.au/types-of-scams/attempts-to-gain-your-personal-information/phishing">phishing</a> and hacking to infiltrate company systems and email accounts. </p>
<p>Offenders can intercept payment invoices, or create their own, and funnel victims’ funds into their own accounts. Businesses and individuals make their payments as usual, but unknowingly pay the offender. </p>
<p>Investment and romance schemes also continue to defraud victims. Reports of investment fraud totalled $126 million, up from $80 million in 2018. And romance fraud losses totalled $83 million, up from $60.5 million in 2018.</p>
<p>Overall, men reported higher financial losses ($77.5 million) than women ($63.6 million).</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1273135104827756545"}"></div></p>
<h2>Years of statistics</h2>
<p>Reflecting on <a href="https://www.accc.gov.au/publications/targeting-scams-report-on-scam-activity/targeting-scams-report-on-scam-activity-2009">a decade</a> of the ACCC’s Targeting Scams reports, we can see how fraud has changed with the times. </p>
<p>Since the first report in 2009 (which recorded $69.9 million in losses) Australians have collectively reported more than <a href="https://www.scamwatch.gov.au/news-alerts/scams-cost-australians-over-630-million">$2.5 billion</a> in losses.</p>
<p>The number of reports has increased significantly. While this likely reflects a higher percentage of the population being targeted, it also represents more authorities receiving complaints and contributing statistics. </p>
<p>For instance, 2019 marked the first year the big four Australian banks (Westpac, NAB, Commonwealth Bank and ANZ) contributed their data. </p>
<h2>The ‘prince of Nigeria’ needs your help</h2>
<p>Today’s offenders have very different approaches to those of ten years ago. There were once many more stories of <a href="https://www.bbb.org/new-york-city/get-consumer-help/articles/the-nigerian-prince-old-scam-new-twist/">Nigerian princes</a> (although these <a href="https://theconversation.com/why-nigerian-prince-scams-continue-to-dupe-us-98232">still exist</a>). </p>
<p>These days, victims are most often contacted by telephone, although email, text message and social media communications are also common. </p>
<p>Payment methods have advanced, too, with <a href="https://www.consumer.ftc.gov/blog/2019/11/scams-telling-you-pay-bitcoin-rise">bitcoin</a> and cryptocurrencies becoming popular ways for offenders to receive money.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/345462/original/file-20200703-33947-9zlsc4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/345462/original/file-20200703-33947-9zlsc4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/345462/original/file-20200703-33947-9zlsc4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/345462/original/file-20200703-33947-9zlsc4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/345462/original/file-20200703-33947-9zlsc4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/345462/original/file-20200703-33947-9zlsc4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/345462/original/file-20200703-33947-9zlsc4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/345462/original/file-20200703-33947-9zlsc4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">According to the ACCC’s 2019 report, men were more likely to report losses to investment fraud, while women were the major target for romance fraud.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Why is fraud still so successful?</h2>
<p>While technology has long helped scammers, it has also helped improve cyber security options such as antivirus software, and email filters to block spam. So why do we still have fraud?</p>
<p>Essentially, fraud takes a human approach. Criminals seek to capitalise on victims’ weaknesses in a calculated manner. For example, this year Australians looking to buy pets during lockdown lost almost $300,000 to <a href="https://www.scamwatch.gov.au/news-alerts/dont-get-scammed-looking-for-a-lockdown-puppy">puppy scams</a>.</p>
<p>Offenders have also shifted their focus to counteract fraud prevention messages to the public from police and other agencies. One prime example is the <a href="https://www.accc.gov.au/system/files/1557_Little%20Black%20Book%20of%20Scams%202019_FA%20WEB.pdf">Little Black Book of Scams</a> released by the ACCC <a href="https://www.scamwatch.gov.au/news-alerts/the-new-little-black-book-of-scams-is-here">in 2008</a>. </p>
<p>It provides comprehensive details of many common fraud schemes and has influenced fraud-prevention messaging across both the <a href="https://www.met.police.uk/SysSiteAssets/media/downloads/central/advice/fraud/met/the-little-book-of-big-scams.pdf">United Kingdom</a> and <a href="https://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04333.html">Canada</a>.</p>
<p>To counter prevention messaging, offenders now recruit Australians to launder their funds. Known as “<a href="https://www.acic.gov.au/media-centre/joint-media-releases/world-wide-week-action-targeting-money-mules">money mules</a>”, they are often victims themselves, asked to receive and transfer money on behalf of offenders. </p>
<p>From a victim’s perspective, there are fewer red flags when asked to send money to a Big Four bank account in Melbourne, compared to sending money to Lagos.</p>
<p>Similarly, since there has been a strong push against sending money to people you don’t know, offenders have embraced the use of romance fraud (which targeted more women than men in 2019). </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/from-catfish-to-romance-fraud-how-to-avoid-getting-caught-in-any-online-scam-115227">From catfish to romance fraud, how to avoid getting caught in any online scam</a>
</strong>
</em>
</p>
<hr>
<p>Offenders develop relationships and build trust to eventually cheat victims. And as last year’s report notes, they are now initiating relationships through channels other than dating apps, such as Instagram and even the online game <a href="https://www.scamwatch.gov.au/news-alerts/romance-scammers-move-to-new-apps-costing-aussies-more-than-286-million">Words with Friends</a>. </p>
<p>With a focus on building relationships with victims, fraud requests are no longer as outrageous as they once were (although this <a href="https://www.huffingtonpost.com.au/entry/nigerian-astronaut-space-trapped_n_56c2ced4e4b0c3c550527f0b?ri18n=true">Nigerian astronaut</a> scam was an exception). </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/345694/original/file-20200706-33913-35lkyg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/345694/original/file-20200706-33913-35lkyg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/345694/original/file-20200706-33913-35lkyg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=415&fit=crop&dpr=1 600w, https://images.theconversation.com/files/345694/original/file-20200706-33913-35lkyg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=415&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/345694/original/file-20200706-33913-35lkyg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=415&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/345694/original/file-20200706-33913-35lkyg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=522&fit=crop&dpr=1 754w, https://images.theconversation.com/files/345694/original/file-20200706-33913-35lkyg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=522&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/345694/original/file-20200706-33913-35lkyg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=522&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">As cybersecurity features such as email spam filters advance, attackers are finding new, innovative ways to deceive victims.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Manipulation and monopolising on emotions</h2>
<p>As we gain a better understanding of how offenders operate, we’re starting to learn how effectively victims can be persuaded. </p>
<p>Fraud relies on the use of <a href="https://eprints.qut.edu.au/66444/">social engineering</a> techniques such as authority and urgency to gain compliance. Offenders often take on the identity of someone with power and status to persuade victims to send money. They also stress the urgency of the request, to stop victims from thinking too much. </p>
<p><a href="https://eprints.qut.edu.au/118434/">Psychological abuse</a> techniques are also used to isolate and monopolise on victims. In this way, offenders try to remove victims from their support networks and place an air of secrecy around their interactions. And this limits a victims ability to seek support when needed. </p>
<p>There has been a greater recognition of the problem across government and industry. Despite this, there’s still often a sense of <a href="https://eprints.qut.edu.au/83702/">shame and embarrassment</a> at being deceived, and victims have difficulty <a href="https://aic.gov.au/publications/tandi/tandi518">reporting</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/inside-the-mind-of-the-online-scammer-127471">Inside the mind of the online scammer</a>
</strong>
</em>
</p>
<hr>
<h2>Defences for the future</h2>
<p>The latest Targeting Scams report shows us offenders are still looking to gain a financial advantage, and will do whatever it takes. While you can’t guarantee safety, there are some simple steps that can help reduce the likelihood of fraud:</p>
<ul>
<li><p>recognise your own vulnerability to fraud. Everyone is a potential target.</p></li>
<li><p>talk about fraud-related experiences with family and friends in a non-judgemental way. Offenders want victims to stay silent.</p></li>
<li><p>in an uncertain situation, don’t feel pressured to xfrespond, as offenders rely on people making quick decisions. Hang up the phone, delete the email, or simply step back.</p></li>
</ul>
<p>Now, more than ever, we must recognise the prevalence of fraud and the ways it impacts individuals and organisations across society. If we can learn from the past decade, maybe we can improve our defences for the next decade. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/TRDgOGf5VAM?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure><img src="https://counter.theconversation.com/content/141289/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Cassandra Cross is affiliated with the Cybersecurity Cooperative Research Centre. She has also received funding from the Australian Institute of Criminology</span></em></p>
Last year, men were more likely to report losses to investment fraud, while women were the main target for romance fraud. Overall, men reported higher financial loss.
Cassandra Cross, Senior Research Fellow, Faculty of Law, Cybersecurity Cooperative Research Centre, Queensland University of Technology
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/129877
2020-01-27T12:18:28Z
2020-01-27T12:18:28Z
Study finds ethics can be taught – in finance, at least
<figure><img src="https://images.theconversation.com/files/311634/original/file-20200123-162228-r5hc0f.jpg?ixlib=rb-1.1.0&rect=14%2C22%2C4970%2C2175&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In 2010, the ethics content of a federal licensing exam for financial advisers was reduced.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/editor/image/microfinance-person-work-his-table-on-439040314">www.shutterstock.com</a></span></figcaption></figure><p>Testing investment advisers on their knowledge of ethics can lead to better behavior, new research shows.</p>
<p><a href="https://www.finra.org/media-center/statistics">According to the Financial Industry Regulatory Authority</a>, 630,000 financial representatives and investment advisers provide financial services to half of all American households. Together, these individuals execute nearly US$40 trillion worth of transactions each year. </p>
<p>About 8% of these employees – or one in 12 – have some form of financial misconduct on their records, according to data from BrokerCheck, an online database on the background and experience of brokers, advisers and firms. <a href="https://www.lawinsider.com/dictionary/financial-misconduct">Financial misconduct</a> ranges from simple oversights, such as the failure to inform customers of the risk of their investments, to more serious incidents, such as forging customer signatures or outright theft and fraud.</p>
<p>I collected the data in 2018 as part of my <a href="https://scholar.google.com/citations?user=YMi6bSgAAAAJ&hl=en">research on financial institutions</a> with co-authors at Notre Dame and the London School of Economics.</p>
<h2>Rules and ethics training in financial markets</h2>
<p>Investor protection has been a <a href="https://legcounsel.house.gov/Comps/Securities%20Act%20Of%201933.pdf">priority for federal and state regulators since the Great Depression</a>. For example, financial representatives seeking to sell investment advice at broker-dealer firms – that is, businesses that buy and sell securities on behalf of customers – must first become registered investment advisers, which involves passing a set of exams. </p>
<p>One such exam is the <a href="https://www.finra.org/registration-exams-ce/qualification-exams/series66">Series 66</a>, which covers two broad topics:
First, investment vehicle characteristics and capital market theory, or “technical material”; and, second, securities laws and prohibitions on unethical business practices, or “rules and ethics.” </p>
<p>On average, those passing the investment adviser exam have five years of industry experience working as financial representatives. </p>
<p>The rules section of the Series 66 exam covers record-keeping requirements, allowable forms of adviser compensation and guidelines about when an investment adviser is permitted to take possession of investor funds.</p>
<p>The ethics section focuses on an adviser’s fiduciary duty to investors – that is, their obligation to act in the investor’s interest rather than their own. </p>
<h2>Can ethics be taught?</h2>
<p>While such licensing requirements have existed for decades, there is a longstanding debate about the effectiveness of ethics training. </p>
<p>Advocates for ethics testing argue that financial crises and corporate scandals, from the <a href="https://www.investopedia.com/updates/enron-scandal-summary/">2001 Enron scandal</a> to the <a href="https://www.federalreservehistory.org/essays/great_recession_of_200709">Great Recession of 2007 to 2010</a>, can often be traced back to poor conduct training and a lack of social norms. </p>
<p>Critics, such as the management guru Peter Drucker, question <a href="https://www.nationalaffairs.com/public_interest/detail/what-is-business-ethics">whether ethics can or even should be taught</a>. <a href="https://www.jstor.org/stable/25072705?seq=1">In their view</a>, business ethics courses were created “largely for the sake of appearances.” </p>
<p>After all, this line of thinking goes, personal beliefs guide behavior – and such beliefs can be difficult to shape in the classroom.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/311636/original/file-20200123-162185-aidjai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/311636/original/file-20200123-162185-aidjai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/311636/original/file-20200123-162185-aidjai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=407&fit=crop&dpr=1 600w, https://images.theconversation.com/files/311636/original/file-20200123-162185-aidjai.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=407&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/311636/original/file-20200123-162185-aidjai.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=407&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/311636/original/file-20200123-162185-aidjai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/311636/original/file-20200123-162185-aidjai.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/311636/original/file-20200123-162185-aidjai.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Ethics knowledge leads to better behavior.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/examining-financial-data-man-looking-through-244224124">www.shutterstock.com</a></span>
</figcaption>
</figure>
<h2>Teaching good behavior</h2>
<p>So, can ethics be taught? According to our new <a href="https://ssrn.com/abstract=3457588">research</a> the evidence points to “yes.”</p>
<p>We studied nearly 1.2 million financial representatives and investment advisers working at U.S. broker-dealers between 2007 and 2017, with a focus on the consequences of a 2010 change to the Series 66 exam. This is the first large-scale analysis of how rules and ethics training affects behavior in the financial sector.</p>
<p>Prior to 2010, 80% of the exam’s questions covered rules and ethics and 20% covered technical material. In response to <a href="https://www.brainscape.com/blog/2018/05/path-series-66-success">calls for more training in technical areas</a>, the exam was changed in 2010 to give equal weight to technical material and rules and ethics.</p>
<p>Our results, which will soon be published in the <a href="https://www.journals.elsevier.com/journal-of-financial-economics">Journal of Financial Economics</a>, show that investment advisers who passed the old exam with more ethics coverage were one-fourth less likely to engage in misconduct in any given year after passing. </p>
<p>We designed our tests to control for other factors that could relate to financial misconduct, such as investment adviser experience and firm reputation. </p>
<h2>Exam has a ‘priming effect’</h2>
<p>The effects of the exam change vary based on industry experience and firm culture. </p>
<p>We found that the least experienced investment advisers are most impacted by the exam’s reduction in rules and ethics-related content. The reduction in ethics content had little to no effect on those already engaging in misconduct in their prior role as financial representatives. </p>
<p>These results suggest the exam plays what’s called a “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2775289%3E%E2%80%9D">priming</a>” role, meaning early exposure to rules and ethics material prepares the individual to behave appropriately later. </p>
<p>We also studied what happens when broker-dealer firms experience ethical turmoil, such as major sanctions or a wave of misconduct. </p>
<p>Take Wells Fargo, for example, which <a href="https://www.reuters.com/article/us-wells-fargo-settlement/wells-fargo-officials-make-record-240-million-settlement-over-bogus-accounts-idUSKCN1QI4P3%3E">faced fines and lawsuits following the 2016 revelation</a> that it opened millions of fake accounts to generate fees and meet sales targets. </p>
<p>As the bank’s rule-breaking began to make headlines, <a href="http://www.nytimes.com/2019/03/09/business/wells-fargo-sales-culture.html%3E">many investment advisers left the firm in protest</a>. When we looked at Wells Fargo investment advisers, we found that those who’d passed the old exam with more ethics coverage were the most likely to leave after the scandal broke. </p>
<p>Employees often observe the early warning signs of corporate wrongdoing, including aggressive sales practices, failure to discipline transgressions and hiring individuals with a history of misconduct. When we examined major scandals at all broker-dealer firms, another interesting pattern emerged: Departures of advisers with more rules and ethics one year indicate a greater likelihood of a scandal breaking at the firm next year. </p>
<h2>Ethics matter</h2>
<p>There may very well be benefits to having increased testing on technical material. Investment advisers may, for example, give their clients better recommendations – an outcome our study did not assess. </p>
<p>What we can say, however, is that those who were tested more rigorously on questions of ethics ended up having fewer episodes of misconduct. They are also less likely to tolerate scandals at their firms.</p>
<p>[ <em>Like what you’ve read? Want more?</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=likethis">Sign up for The Conversation’s daily newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/129877/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Gordon Sutherland does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Investment advisers who passed a licensing exam with more ethics questions were one-fourth less likely to engage in misconduct than those with less ethics training, according to a new study.
Andrew Gordon Sutherland, Ford International Career Development Professor; Associate Professor, Massachusetts Institute of Technology (MIT)
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/125799
2019-11-21T23:32:22Z
2019-11-21T23:32:22Z
Why New Zealand courts should take poverty into account in sentencing decisions
<figure><img src="https://images.theconversation.com/files/302812/original/file-20191121-554-9bzzbp.jpg?ixlib=rb-1.1.0&rect=39%2C156%2C4322%2C2530&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">An analysis of some of the most serious cases of financial fraud in New Zealand shows white-collar offenders received discounted sentences despite a range of aggravating factors.</span> <span class="attribution"><span class="source">from www.shutterstock.com</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>A <a href="https://www.courtsofnz.govt.nz/cases/zhang-v-r">Court of Appeal decision</a> in New Zealand set a precedent last month, allowing offenders to argue their drug addiction should be considered a mitigating factor. </p>
<p>Methamphetamine dealers who can prove their personal addiction played a role in their offending are now eligible for a shorter sentence, reduced by up to 30%.</p>
<p>This change is part of an overhaul of guidelines used by judges since 2005. Another update is that lawyers and judges are encouraged to adjourn sentencing to give offenders time for rehabilitation. </p>
<p>The judgement follows a <a href="http://www.legislation.govt.nz/bill/government/2019/0119/latest/LMS167550.html">new law</a> that gives police discretion to use a “health-centred approach” in some cases where individuals are found in possession of illegal drugs for personal use. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/new-law-gives-nz-police-discretion-not-to-prosecute-drug-users-but-to-offer-addiction-support-instead-122323">New law gives NZ police discretion not to prosecute drug users, but to offer addiction support instead</a>
</strong>
</em>
</p>
<hr>
<p>Here I argue we should extend this approach to other crimes where poverty, deprivation or addiction play a key role in the offending. My <a href="https://journals.sagepub.com/doi/10.1177/0964663919883367">research</a> into financial crime shows white-collar offenders are privileged in the New Zealand justice system. </p>
<h2>Privilege for offenders who are already advantaged</h2>
<p>In my recently published <a href="https://journals.sagepub.com/doi/10.1177/0964663919883367">research</a>, I have analysed the sentencing decisions in 30 high-profile white-collar financial fraud cases. I have also reviewed a similar number of <a href="https://www.emerald.com/insight/content/doi/10.1108/PAR-10-2016-0094/full/html">blue-collar</a> financial crime cases, such as welfare fraud. </p>
<p>I used judges’ sentencing notes from five years of Serious Fraud Office (<a href="https://www.sfo.govt.nz/">SFO</a>) prosecutions in New Zealand. This included significant mortgage fraud (the highest value was NZ$54 million) and ponzi schemes (highest value NZ$17.5 million). The average value of the prosecuted cases was NZ$3.5 million.</p>
<p>I analysed the extent to which factors such as good character, reputation damage, the ability to pay reparation and to provide strong references affected sentencing outcomes favourably for white-collar offenders. </p>
<p>These mitigating factors are frequently the benefits of privilege. It is unusual for factors such as good character or loss of community standing to be considered in determining the sentences in blue-collar financial crimes.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-global-war-on-money-laundering-is-a-failed-experiment-125143">The global war on money laundering is a failed experiment</a>
</strong>
</em>
</p>
<hr>
<h2>Changing sentencing</h2>
<p>The sentencing process and outcome is an important part of the justice system. Not only does it determine the short- and long-term future of the offender, it also communicates society’s perspectives on crime and criminals. Therefore, increased debate is welcome. </p>
<p>The purposes of sentencing in New Zealand are set out in the <a href="http://www.legislation.govt.nz/act/public/2002/0009/latest/DLM135342.html">Sentencing Act 2002</a>. In summary, they are to hold the offender accountable, create deterrence, denounce criminal conduct, rehabilitate, provide for the interests of the victim, provide reparation and protect the community. </p>
<p>In sentencing, the court must consider the offender’s personal, family, community and cultural background. Relevant aggravating and mitigating factors must also be taken into account.</p>
<p>Aggravating factors include the particular circumstances of the offending and the culpability of the offender, the impact on the victim, whether there was a vulnerable victim, whether there was an abuse of trust or authority, any prior convictions of the offender and any loss, damage or harm from the offending. </p>
<p>Relevant mitigating factors include the age of the offender, whether and when the offender pleaded guilty, whether the offender had limited involvement in the offence, any remorse shown by the offender and evidence of the offender’s previous good character. </p>
<p>As the table below shows, in my <a href="https://journals.sagepub.com/doi/10.1177/0964663919883367">study</a> the good character of the offender was referred to in all 30 Serious Fraud Office cases.</p>
<iframe title="Analysis of sentencing outcomes in cases of serious fraud" aria-label="Table" src="https://datawrapper.dwcdn.net/8IsZZ/1/" scrolling="no" frameborder="0" style="border: none;" width="100%" height="778"></iframe>
<p>It is relevant to note it’s often the good character of these offenders that facilitates the crime because they were in a position of trust. </p>
<h2>Buying justice</h2>
<p>The quality of references and testimonials was referred to in 50% of the fraud cases. Access to superior networks of people who can vouch for one’s prior good character and good works, despite the presence of crime, may result in a shorter sentence. </p>
<p>Reference to other hurt such as shame or loss of community standing was referred to in 27% of cases. The <a href="https://journals.sagepub.com/doi/10.1177/0306624X03256660">academic literature</a> suggests white-collar offenders are in a better position to recover and maintain stable employment after committing a crime, unlike those who commit blue-collar crimes.</p>
<p>Restitution is another mitigating factor that can result in a sentence discount. In the cases I examined, reparation was evident in eight cases, with two offenders offering full reparation and the others offering partial reparation. Where reparation was provided, it resulted in a sentence discount. </p>
<p>This leads to the suggestion offenders can “buy justice”. Those who have resources to provide financial recompense may benefit from a sentence discount, when their equivalent poorer counterparts may not.</p>
<p>The majority of the cases outlined in the table received a discount for at least some of the mitigating factors. This is despite the presence of a range of aggravating factors (also shown in the table) such as vulnerable victims, significant harm, systematic offending over long periods of time and abuses of trust. </p>
<p>I propose three changes to sentencing decisions:</p>
<p><strong>1.</strong> the “good character” of white-collar offenders should not be considered as a mitigating factor when the good character has been an enabler of the offending because people trusted them</p>
<p><strong>2.</strong> restitution should not be treated as a mitigating factor of the offending, but rather the absence of restitution should be considered as an aggravating factor</p>
<p><strong>3.</strong> other harms, such as loss of reputation or feelings of shame are a natural corollary of the offending and do not justify sentence discounts.</p><img src="https://counter.theconversation.com/content/125799/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>I have previously received funding (a Marsden grant) from the Royal Society of New Zealand. This did not help fund the current study. </span></em></p>
A New Zealand Court of Appeal decision set a precedent last month. Offenders who can prove their personal addiction played a role in their crime are now eligible for a shorter sentence.
Lisa Marriott, Professor of Taxation, Te Herenga Waka — Victoria University of Wellington
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/120270
2019-08-02T12:23:09Z
2019-08-02T12:23:09Z
Scammers don’t cheat because they need the money — they cheat because they’re cheaters
<figure><img src="https://images.theconversation.com/files/286293/original/file-20190730-186833-1mvc061.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cheating in games may have more to do with personality than with economic necessity, a new study finds.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/download/confirm/479597200?src=uyAnloX-B0Zr1I6Wdjl95w-6-61&studio=1&size=huge_jpg">Shutterstock</a></span></figcaption></figure><p>Why do people cheat? </p>
<p>When we hear that a poor person scammed others out of money, we may attribute this behavior to their poverty, rationalizing that the person violated ethics and the law because <a href="https://nyc.streetsblog.org/2019/07/23/cy-vances-tale-of-two-cities-bus-fare-evaders-go-to-court-subway-scofflaws-go-free/">they needed the money</a>.</p>
<p>But the rich and powerful also cheat: <a href="https://www.nbcnews.com/politics/politics-news/manafort-pleads-not-guilty-state-mortgage-fraud-charges-n1023311">falsifying loan applications</a>, evading taxes, and running <a href="https://www.theguardian.com/business/2009/jun/29/bernard-madoff-sentence">Ponzi schemes</a> that defraud investors of millions.</p>
<p>As a <a href="https://hbl.tamu.edu/people/">behavioral economist</a>, I am fascinated by how money affects decision-making. If money were the driving factor behind cheating, for example, it wouldn’t really make sense for wealthy people to break the law for financial gain.</p>
<p>To find out whether cheating is driven by economic necessity or personality, economist Billur Aksoy and I conducted an experiment. We wanted to understand the role money plays in financial frauds. </p>
<p>Our <a href="https://www.sciencedirect.com/science/article/pii/S0167268119302148?via%3Dihub">findings</a>, published in the Journal of Economic Behavior & Organization in July 2019, suggest that people’s propensity to cheat does not reflect their economic situation. People inclined to cheat will do so whether they are rich or poor.</p>
<h2>Perfectly isolated</h2>
<p>To conduct our study, we identified an <a href="https://pdfs.semanticscholar.org/0c06/e25f99c4a78b6723fd107eb13840ef2e4273.pdf">unusual</a> place – a kind of petri dish where the same people experience both wealth and poverty. It’s a remote and isolated coffee-growing village at the base of Guatemala’s <a href="https://www.nbcnews.com/news/world/guatemala-s-erupting-volcano-fire-prompts-evacuations-n937796">Fuego Volcano</a>.</p>
<p>Part of the year, the seven months before the autumn harvest, the villagers experience scarcity. During Guatemala’s five-month coffee harvest, however, the village is relatively prosperous. Without banks or access to credit, the farmers can’t really make their earnings last much beyond the harvest period.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/286282/original/file-20190730-186819-attw3r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/286282/original/file-20190730-186819-attw3r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=335&fit=crop&dpr=1 600w, https://images.theconversation.com/files/286282/original/file-20190730-186819-attw3r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=335&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/286282/original/file-20190730-186819-attw3r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=335&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/286282/original/file-20190730-186819-attw3r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=421&fit=crop&dpr=1 754w, https://images.theconversation.com/files/286282/original/file-20190730-186819-attw3r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=421&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/286282/original/file-20190730-186819-attw3r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=421&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Guatemala’s Fuego Volcano and surrounding villages.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Guatemala-Volcano-of-Fire/bb8f0996ba9b41b8ae6a868eed9ce317/14/0">AP Photo/Santiago Billy</a></span>
</figcaption>
</figure>
<p>I say “relatively” because even during the harvest, the Guatemalan village still lacks access to health care, food and clean water. Residents told us they earn, on average, about $3 a day. The coffee harvest is a time of comparative prosperity that briefly eases their poverty. </p>
<p>The unique financial situation of these villagers meant we could study the same group of people in both scarcity and abundance, knowing that mitigating factors – stress level, physical activity, <a href="https://theconversation.com/in-central-america-gangs-like-ms-13-are-bad-but-corrupt-politicians-may-be-worse-86113">domestic instability</a> and so on – would remain similar across the population. </p>
<p>And since a recent <a href="https://www.ncbi.nlm.nih.gov/pubmed/26958830">study</a> conducted in 23 countries shows that people cheat at about the same rates in rich and poor countries, we knew that our results would not be <a href="https://www.econometricsociety.org/publications/econometrica/2019/07/01/preferences-truth-telling">exclusive to Guatemala</a>. </p>
<h2>Roll of the dice</h2>
<p>We first visited these Guatemalan villagers in September 2017, before the first harvest, when their financial resources were scarcest. We returned in December, when coffee sales had significantly boosted their disposable income.</p>
<p>On both visits we played a <a href="https://academic.oup.com/jeea/article/11/3/525/2300098">simple game</a> with the same set of 109 villagers. The participants in our study would put a six-sided die in a cup and roll it. They would then tell us – but not show us – the outcome of their roll, and shake the cup again so that no one else could see what they rolled. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/286283/original/file-20190730-186809-9yqsor.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/286283/original/file-20190730-186809-9yqsor.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/286283/original/file-20190730-186809-9yqsor.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/286283/original/file-20190730-186809-9yqsor.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/286283/original/file-20190730-186809-9yqsor.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/286283/original/file-20190730-186809-9yqsor.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/286283/original/file-20190730-186809-9yqsor.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">After repeated rolls, each side of a six-sided die should come up 16.67% of the time.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/download/confirm/1102676027?src=Np5vPfvl34dxxS_AYO1tdg-1-2&studio=1&size=huge_jpg">Shutterstock</a></span>
</figcaption>
</figure>
<p>The game’s design ensured we wouldn’t know whether individual players were accurately reporting their rolls.</p>
<p>The villagers were paid the Guatemalan equivalent of US$1 for the number they rolled. So, if they rolled a four, they got $4. A two earned $2. The exception was six, which according to our rules paid nothing. </p>
<p>Statistically, we knew, the three highest payout numbers of the six possible rolls – three, four and five – should have come up 50% of the time. The rest of the rolls should be low-earning numbers: one, two and six. </p>
<p>Yet, on both trips, the participants in our study reported rolling the high payout numbers about 85% of the time. The number five, the most lucrative roll, was reported more than 50% of the time. And almost no one admitted to rolling a six, which paid nothing. </p>
<p>These results indicate cheating on a large scale, both in prosperous times and in poverty. If people are inclined to cheat, it seems, and they think they can get away with it, they’ll do it – rich or poor.</p>
<h2>Unexpected generosity</h2>
<p>After running this first experiment, Prof. Aksoy and I asked players to roll the dice again. </p>
<p>This time, their roll would determine the payment for someone else from their village. In a small town like this village, in practice that meant people were playing to boost the earnings of their friends, family, neighbors and coworkers. </p>
<p>In this round of play, the high-payout numbers were reported at a somewhat lower rate than during the first round – 73% during the abundant harvest season and 75% during lean times. Cheating was still occurring, but somewhat less often. As in the prior round, the cheating rate was similar in scarce times and abundance.</p>
<p>That pattern changed when we asked the villagers to roll the die to determine the payment for a stranger – someone from outside the village.</p>
<p>In December, a time of abundance, the villagers reported both high and low payouts about 50% of the time – right in line with their statistical probability. They did not cheat for the financial gain of strangers. In times of scarcity, however, the villagers reported rolling high payout numbers about 70% of the time, lying to benefit strangers at roughly the same rate they had for their neighbors.</p>
<p>Why would people break the rules for someone else when they themselves were at their poorest?</p>
<p>We believe that the villagers became more empathetic during times of scarcity, feeling the same concern for outsiders as they did for their friends and family.</p>
<h2>For richer or poorer</h2>
<p>Our two biggest findings – that people will game the system at roughly the same rates whether they are rich or poor and that generosity for strangers does not depend on wealth – should be taken with caution. This was just one study in one country.</p>
<p>But researchers in Thailand recently reached conclusions similar to ours in an experiment they conducted with rice farmers. The participants in their unpublished study also lied for personal gain in both good and bad times.</p>
<p>The evidence suggests that wealth influences cheating much less than a person’s ethics – that is, whether or not they are inclined towards cheating. This conclusion is in line with recent studies suggesting that people who engage in <a href="https://www.sciencedirect.com/science/article/pii/S0022103109000365">antisocial behavior</a> or commit <a href="https://research.vu.nl/en/publications/rational-misbehavior-evaluating-an-integrated-dual-process-model-">crimes</a> may have a genetic predisposition to do so.</p>
<p>In other words, some people may be born with a propensity to cheat others out of their money. If so, then environmental factors like poverty and opportunity are not the reason for cheating – they are an excuse to explain bad behavior.</p>
<p>[ <em><a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=expertise">Expertise in your inbox. Sign up for The Conversation’s newsletter and get a digest of academic takes on today’s news, every day.</a></em> ]</p><img src="https://counter.theconversation.com/content/120270/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marco A. Palma does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Why do even the rich cheat on their taxes? Roesearch suggests some people may be genetically predisposed to break the rules for their own financial gain.
Marco A. Palma, Professor of Agricultural Economics and Director Human Behavior Laboratory, Texas A&M University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/114706
2019-05-13T10:37:13Z
2019-05-13T10:37:13Z
How cryptocurrency scams work
<figure><img src="https://images.theconversation.com/files/273690/original/file-20190509-183112-75zv1.jpg?ixlib=rb-1.1.0&rect=404%2C31%2C4781%2C3421&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Don't end up like this person.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/shocked-stressed-young-woman-reading-bad-1297544869">fizkes/Shutterstock.com</a></span></figcaption></figure><p><a href="https://navms.com/allegedly-head-of-the-bitconnect-cryptocurrency-scam-arrested-in-dubai/">Millions of cryptocurrency investors</a> have been scammed out of massive sums of real money. In 2018, losses from cryptocurrency-related crimes amounted to <a href="https://www.reuters.com/article/us-crypto-currency-crime/cryptocurrency-thefts-scams-hit-1-7-billion-in-2018-report-idUSKCN1PN1SQ">US$1.7 billion</a>. The criminals use both old-fashioned and new-technology tactics to swindle their marks in schemes based on digital currencies exchanged through online databases called blockchains.</p>
<p>From <a href="https://scholar.google.com/citations?user=Qx3YMi4AAAAJ&hl=en&oi=ao">researching</a> <a href="https://doi.org/10.1109/MITP.2017.3051335">blockchain</a>, <a href="https://doi.org/10.1109/MITP.2017.3680961">cryptocurrency</a> and <a href="https://www.springer.com/us/book/9783642115219">cybercrime</a>, I can see that some cryptocurrency fraudsters rely on <a href="https://thenextweb.com/hardfork/2019/04/04/indian-entrepreneur-implicated-in-300-million-bitcoin-ponzi-scheme-gets-bail/">tried-and-true Ponzi schemes</a> that use income from new participants to pay out returns to earlier investors. </p>
<p>Others use <a href="https://www.buzzfeednews.com/article/ryanmac/cryptocurrency-scammers-are-running-wild-on-telegram">highly automatized and sophisticated processes</a>, including automated software that interacts with Telegram, an internet-based instant-messaging system popular among people interested in cryptocurrencies. Even when a cryptocurrency plan is legitimate, fraudsters can still <a href="https://theconversation.com/how-can-criminals-manipulate-cryptocurrency-markets-97294">manipulate its price in the marketplace</a>.</p>
<p>An even more basic question arises, though: How are unsuspecting investors attracted to cryptocurrency frauds in the first place? </p>
<h2>Fast-talking swindlers</h2>
<p>Some cryptocurrency fraudsters appeal to people’s greed, promising big returns. For example, an unknown group of entrepreneurs runs the scam bot iCenter, which is a <a href="https://medium.com/@nickcryptoltc/ponzi-investment-schemes-new-and-improved-on-the-blockchain-icenter-co-f9ee68f6c8fe">Ponzi scheme for Bitcoin and Litecoin</a>. It doesn’t provide information on investment strategies, but somehow <a href="https://www.buzzfeednews.com/article/ryanmac/cryptocurrency-scammers-are-running-wild-on-telegram">promises investors 1.2% daily returns</a>.</p>
<p>The iCenter scheme operates through a group chat on Telegram. It starts with a small group of scammers who are in on the racket. They get a referral code that they share with others, in blogs and on social media, hoping to get them to join the chat. Once there, the newcomers see encouraging and exciting messages from the original scammers. Some newcomers decide to invest, at which point they are assigned an individual bitcoin wallet, into which they can deposit bitcoins. They agree to wait some period of time – 99 or 120 days – to receive a significant return.</p>
<p>During that time, the newcomers often use <a href="https://thenextweb.com/hardfork/2018/12/17/cryptocurrency-italy-silly-scams/">social media to share their own referral codes</a> with friends and contacts, bringing more people into the group chat and into the investment scheme. There’s no actual investment of the funds in any legitimate business. Instead, when new people join, the person who recruited them gets a percentage of the new funds, and the cycle continues, paying out to earlier participants from each round of newer investors.</p>
<p>Some members work especially hard to bring in new funds, posting <a href="https://www.buzzfeednews.com/article/ryanmac/cryptocurrency-scammers-are-running-wild-on-telegram">tutorial videos and pictures of themselves holding large amounts of money</a> as enticements to join the scam.</p>
<h2>Lies and more lies</h2>
<p>Some scammers go for straight-up deception. The founders of scam cryptocurrency OneCoin <a href="https://cointelegraph.com/news/us-district-attorney-charges-onecoin-founders-with-billions-in-alleged-fraud">defrauded investors of $3.8 billion</a> by convincing people their <a href="https://qz.com/1568908/onecoin-is-unraveling-as-a-cryptocurrency-pyramid-scheme/">nonexistent cryptocurrency was real</a>.</p>
<p>Other scams are based on impressing potential victims with jargon or claims of specialized knowledge. The Global Trading scammers claimed they took advantage of <a href="https://www.wsj.com/articles/bitcoins-crashing-that-wont-stop-arbitrage-traders-from-raking-in-millions-1517749201">price differences on various cryptocurrency exchanges</a> to profit from what is called arbitrage – simply buying cheaply and selling at higher prices. Really they just took investors’ money.</p>
<p>Global Trading used a bot on Telegram, too – investors could send a balance inquiry message and <a href="https://www.buzzfeednews.com/article/ryanmac/cryptocurrency-scammers-are-running-wild-on-telegram">get a response with false information</a> about how much was in their account, sometimes even seeing balances <a href="https://steemit.com/bitconnect/@jjona/global-trading-bot-promising-6-gains-per-day">climb by 1% in an hour</a>. With returns looking like that, who could blame people for <a href="https://steemit.com/bitconnect/@jjona/global-trading-bot-promising-6-gains-per-day">sharing the scheme</a> with their friends and family on social media?</p>
<h2>Exploiting friends and family</h2>
<p>Once a scheme has started, it stays alive – at least for a while – through social media. One person gets taken in by the promise of big returns on cryptocurrency investments and spreads the word to <a href="https://news.bitcoin.com/crypto-scams-comprise-0-6-fraud-australian-consumer-watchdog/">friends and family members</a>.</p>
<p>Sometimes big names get involved. For instance, the kingpin behind <a href="https://entrackr.com/2019/04/amit-bhardwaj-bail-bitoin/">GainBitcoin</a> and other alleged scams in India convinced a number of Bollywood celebrities to <a href="https://www.ccn.com/indian-authorities-round-up-on-bitcoin-scammers-properties-worth-60-million">promote his book, “Cryptocurrency for Beginners</a>.” He even tried to make himself <a href="https://cointelegraph.com/news/india-crypto-scamsters-bhardwaj-brothers-arrested-for-duping-investors-out-of-300-mln">a bit of a celebrity</a>, proclaiming himself a “<a href="https://www.prnewswire.com/in/news-releases/cryptocurrency-guru-amit-bhardwaj-launches-pioneering-e-book-632585663.html">cryptocurrency guru</a>,” as he <a href="https://www.ccn.com/indian-police-find-crucial-clues-in-300-million-gainbitcoin-scam">led</a> <a href="https://www.businesstoday.in/current/corporate/cryptocurrency-guru-arrested-for-bitcoin-ponzi-schemes-scam-could-run-into-rs-13000-crore/story/274255.html">efforts</a> <a href="https://captainaltcoin.com/scam-alert-mcap-coin-is-dead-as-a-dodo/">that</a> <a href="https://www.crowdfundinsider.com/2018/12/142666-indian-police-arrest-10-in-gb21-crypto-ponzi-fraud-case/">cost</a> investors between <a href="https://coinjournal.net/exit-scam-vietnamese-cryptocurrency-company-goes-dark-after-allegedly-duping-investors-of-us660m/">$769 million and $2 billion</a>.</p>
<p>Not all the celebrities know they’re involved. In one blog post, iCenter featured a video that purported to be an <a href="https://www.buzzfeednews.com/article/ryanmac/cryptocurrency-scammers-are-running-wild-on-telegram">endorsement by Dwayne “The Rock” Johnson</a>, holding a sign featuring iCenter’s logo. Videos of Justin Timberlake and Christopher Walken were deceptively edited so they appeared to praise iCenter, too.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/3yGlurBytwA?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Dwayne ‘The Rock’ Johnson does not actually endorse this cryptocurrency scam.</span></figcaption>
</figure>
<h2>Fraudulent initial coin offerings</h2>
<p>Another popular scam technique is called an “initial coin offering.” A potentially legitimate investment opportunity, an initial coin offering essentially is a way for a startup cryptocurrency company to raise money from its future users: In exchange for sending active cryptocurrencies like bitcoin and ethereum, customers are promised a discount on the new cryptocoins.</p>
<p>Many initial coin offerings have <a href="https://ethereumworldnews.com/consumers-lose-100-million-ico-exit-scams/">turned out to be scams</a>, with organizers engaging in cunning plots, even renting fake offices and creating fancy-looking marketing materials. In 2017, a lot of hype and media coverage about cryptocurrencies fed a huge wave of initial coin offering fraud. In 2018, <a href="https://www.cryptoglobe.com/latest/2018/12/nearly-1000-dead-cryptocurrency-projects-identified-by-coinopsy-deadcoins/">about 1,000 initial coin offering efforts</a> collapsed, costing backers at least $100 million. Many of these projects had no original ideas – <a href="https://www.wsj.com/graphics/whitepapers/">more than 15% of them</a> had copied ideas from other cryptocurrency efforts, or even plagiarized supporting documentation.</p>
<p>Investors looking for returns in a new technology sector are still interested in blockchains and cryptocurrencies – but should beware that they are complex systems that are new even to those who are selling them. Newcomers and relative experts alike have fallen prey to scams. </p>
<p>In an environment like the current cryptocurrency market, potential investors should be very careful to research what they’re putting their money into and be sure to find out who is involved as well as what the actual plan is for making real money – without defrauding others.</p><img src="https://counter.theconversation.com/content/114706/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nir Kshetri does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Cryptocurrency fraudsters have swindled their victims out of hundreds of millions – even billions – of dollars. What do they do to earn people’s trust and then take their money?
Nir Kshetri, Professor of Management, University of North Carolina – Greensboro
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/109203
2019-01-24T11:56:22Z
2019-01-24T11:56:22Z
There’s a wider scandal suggested by the Trump investigations
<figure><img src="https://images.theconversation.com/files/255035/original/file-20190122-100288-1yam1pb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The New York district attorney dropped a financial fraud investigation of Ivanka Trump, left, and her brother, Donald Jr., right.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Trump/02c53f5f0b9b4288b62f041a94e9e1d5/13/0">AP/Seth Wenig</a></span></figcaption></figure><p>The scope of financial crimes unearthed so far by state and federal authorities investigating President Trump and his associates is remarkable. </p>
<p><a href="https://www.nytimes.com/2018/08/21/us/politics/paul-manafort-trial-verdict.html">Paul Manafort was found guilty of bank and tax fraud</a>, and faces <a href="https://www.npr.org/2018/08/22/641005286/after-being-convicted-of-8-charges-in-va-paul-manafort-will-face-d-c-trial">another trial involving charges of money laundering</a>. </p>
<p>Former campaign adviser <a href="https://www.nytimes.com/2018/02/23/us/politics/rick-gates-guilty-plea-mueller-investigation.html">Rick Gates pleaded guilty to financial fraud</a>. </p>
<p>Former Trump attorney Michael Cohen <a href="https://www.nytimes.com/interactive/2018/08/21/us/mueller-trump-charges.html">pleaded guilty to tax evasion and illegal campaign donations</a>. <a href="https://ag.ny.gov/press-release/ag-underwood-announces-stipulation-dissolving-trump-foundation-under-judicial">The Trump Foundation was just dissolved</a> over what the New York attorney general described as “a shocking pattern of illegality.” </p>
<p>And authorities opened new investigations following a recent New York Times exposé describing <a href="https://www.nytimes.com/interactive/2018/10/02/us/politics/donald-trump-tax-schemes-fred-trump.html">hundreds of millions of dollars of potential financial fraud by the Trump family</a>. </p>
<p>Even more remarkable is what these investigations tell us about the levels of criminality among America’s business and political elite. </p>
<p>Tax evasion, money laundering, financial fraud and campaign finance violations: Every turned stone reveals thick webs of financial misdeeds.
These white collar crimes, which often implicate the powerful and the wealthy, notoriously thrive in the loose regulatory environments created when big money exerts undue influence on politics.</p>
<h2>Mounting indications</h2>
<p>The Trump investigations join a growing body of evidence pointing to lax enforcement of high-level financial crimes. </p>
<p>We know, for example, that massive fraud involved in the 2008 financial collapse – from <a href="http://irle.berkeley.edu/the-causes-of-fraud-in-financial-crises-evidence-from-the-mortgage-backed-securities-industry/">mortgage lenders who deceived customers to banks that deceived investors</a> – <a href="https://www.nytimes.com/2015/04/21/business/dealbook/financial-crisis-cases-sputter-to-an-end.html">went essentially unpunished</a>. </p>
<p>We know that under-enforcement is common with certain big-ticket tax evasion practices – like misstating the value of assets under the gift tax. Gift tax <a href="https://www.forbes.com/sites/ashleaebeling/2017/10/19/irs-announces-2018-estate-and-gift-tax-limits-11-2-million-per-couple/#60f289064a4b">fraud, which may save millions of dollars to a taxpayer</a>, is a major component of the alleged <a href="https://www.nytimes.com/interactive/2018/10/02/us/politics/donald-trump-tax-schemes-fred-trump.html">tax evasion scheme of the Trump family</a>.</p>
<p>Lax enforcement and minor punishments are notoriously common with violations of campaign finance laws – the point where <a href="https://harvardlawreview.org/2018/03/eliminating-the-fec-the-best-hope-for-campaign-finance-regulation/">private and public corruption often meet</a>. </p>
<p>And as for money-laundering: According to congressional testimony, regulations against it are so ineffective that “the bottom-line metrics suggest that <a href="https://www.judiciary.senate.gov/imo/media/doc/Cassara%20Testimony.pdf">money-laundering enforcement fails 99.9 percent of the time</a>.”</p>
<h2>Executive, legislative and judicial failures</h2>
<p>The blame for this loose regulatory environment is not limited to lax executive enforcement. Legislative and judicial actions play a substantial part in the swirling financial illegalities. </p>
<p>Congress, for example, is responsible for the many easily abused tax <a href="https://www.nytimes.com/2018/10/11/opinion/trump-bezos-estate-tax.html">deductions for the rich that</a> <a href="https://www.salon.com/2013/04/12/10_tax_dodges_that_help_the_rich_get_richer_partner/">populate our tax code</a>. And legislators have long <a href="https://www.cbpp.org/blog/2018-funding-bill-falls-short-for-the-irs">refused to fund the IRS at levels allowing effective tax enforcement</a>. </p>
<p>It is also Congress that has structured the <a href="https://harvardlawreview.org/2018/03/eliminating-the-fec-the-best-hope-for-campaign-finance-regulation/">Federal Election Commission as a weak and conflict-ridden</a> enforcer of campaign finance regulations.</p>
<p>The courts have similarly contributed to the lax regulatory environment. As a professor of constitutional law (and ex-prosecutor), I have watched with concern as recent Supreme Court cases extended ever-increasing constitutional protections to the alliance between big money and politics. </p>
<p>In recent years, the Supreme Court <a href="https://fas.org/sgp/crs/misc/R45320.pdf">invalidated numerous campaign finance restrictions by declaring them unconstitutional</a>. In doing so, the court stated that “a substantial and legitimate reason” for making a political campaign contribution is that “the candidate will respond by <a href="https://www.supremecourt.gov/opinions/09pdf/08-205.pdf">producing those political outcomes the supporter favors</a>.” </p>
<p>What many regard as political <a href="https://law.uoregon.edu/images/uploads/entries/Ofer_Raban-Constitutionalizing_Corruption.pdf">corruption is constitutionally protected as a staple of democracy by our highest court</a>.</p>
<p>Six months before Trump’s election, the Supreme Court reversed the criminal conviction of a former Virginia governor on federal corruption charges. Gov. Robert McDonnell received personal gifts and loans worth hundreds of thousands of dollars from a <a href="https://www.supremecourt.gov/opinions/15pdf/15-474_ljgm.pdf">Virginia businessman</a>. </p>
<p>In exchange, McDonnell sought to influence the University of Virginia to conduct free research on the man’s commercial product.</p>
<p>A jury convicted the governor on federal corruption charges, and a federal court of appeals affirmed. But the Supreme Court reversed the conviction after <a href="https://theconversation.com/its-getting-harder-to-prosecute-politicians-for-corruption-91609">narrowing the definition of what counts as criminal corruption</a> under federal law. </p>
<p>The conviction, said the court, raised serious constitutional concerns because it could chill interactions between politicians and their supporters. </p>
<p>As in McDonnell’s own case, the decision’s significance extends beyond matters of campaign finance. The case was recently cited as a cause for the acquittal, on federal bribery charges, of a high-ranking New York City police official who for years received <a href="https://www.nytimes.com/2019/01/02/nyregion/nypd-bribes-trial-grant-reichberg.html">lavish gifts from wealthy businessmen</a>.</p>
<h2>Business and political elite</h2>
<p>The rich rewards of the Trump investigations suggest that big-money illegalities are rife in America. And while Trump may be in a league of his own, the problem is not limited to Trump. </p>
<p>Indeed, some of the people embroiled in the Trump scandals have long been situated at the heart of America’s business and political elite. </p>
<p>Paul Manafort, for one, also worked on the campaigns of <a href="https://www.cnbc.com/2017/10/30/who-is-paul-manafort-a-brief-timeline-of-his-political-career.html">Gerald Ford, Ronald Reagan, George H.W. Bush and Bob Dole</a>. And the Trumps themselves were always highly politically connected – <a href="https://ballotpedia.org/History_of_Donald_Trump%27s_political_donations">contributing millions</a> to leading state and federal politicians, both Democrats and Republicans.</p>
<p>“As a business person,” explained Trump in a 2015 interview, “you wanna get along with all sides <a href="https://www.buzzfeednews.com/article/christophermassie/trump-on-donating-to-democrats-as-a-business-person-youre-go#.npE4zmNdOq">because you’re gonna need things from everybody</a>.”</p>
<p>Consider the recently disclosed episode involving Manhattan District Attorney Cyrus Vance, Jr. – son of the <a href="https://history.state.gov/departmenthistory/people/vance-cyrus-roberts">late former secretary of state under President Carter</a>. </p>
<p>In 2012, Vance ordered prosecutors to drop a promising fraud case against Ivanka Trump and Donald Trump Jr. for lying to investors in a Trump project in Manhattan. The order was made after their father’s attorney paid Vance a visit. </p>
<p>Weeks later, the attorney became one of <a href="https://www.propublica.org/article/ivanka-donald-trump-jr-close-to-being-charged-felony-fraud">Vance’s largest donors for his re-election campaign</a>. </p>
<p>That is the wider scandal suggested by the investigations of Trump and his cronies: The high levels of brazen big-money illegalities that ordinarily go unaddressed and unpunished. Indeed many of the alleged crimes <a href="https://www.nytimes.com/interactive/2018/10/02/us/politics/donald-trump-tax-schemes-fred-trump.html">are no longer chargeable</a> due to the statute of limitations. </p>
<p><a href="https://www.justice.gov/crt/file/883296/download">“Zero tolerance”</a> and <a href="https://cebcp.org/evidence-based-policing/what-works-in-policing/research-evidence-review/broken-windows-policing/">“broken windows” policies</a> are terms frequently used by law enforcement in discussing low-level crime. But American law enforcement appears to avoid the penthouses. </p>
<p>There is deep irony in the fact that Trump and his cronies are being pursued for the sort of crimes whose chronic under-enforcement generated the inequality and resentment that helped catapult Trump to the presidency.</p><img src="https://counter.theconversation.com/content/109203/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ofer Raban does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
The investigations into the financial dealings of Donald Trump and his associates join a growing body of evidence pointing to lax enforcement of certain high-level financial crime.
Ofer Raban, Professor of Constitutional Law, University of Oregon
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/102052
2018-09-03T16:14:41Z
2018-09-03T16:14:41Z
Convicted UBS trader Kweku Adoboli faces deportation – here’s why it’s a huge mistake
<p>Former UBS trader, Kweku Adoboli was convicted in 2012 for his <a href="https://www.bbc.com/news/business-45263831">role in a US$2.3 billion bank fraud</a>. He was released from prison in June 2015, having served four years of a seven-year sentence, but now faces deportation to his native Ghana, despite not living there since the age of four. </p>
<p>I believe this is a huge mistake. If the deportation goes ahead, a great opportunity to learn from Adoboli’s mistakes will have been denied to all those involved in delivering resilient <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12295">and socially useful financial services</a>.</p>
<p>Adoboli <a href="https://www.bbc.co.uk/news/business-45263831">faces deportation</a> because of a law that requires foreign nationals with convictions of more than four years to be deported to their country of birth. And, although he was at fault, he was also part of a culture of risk taking that led him astray.</p>
<p>When we entrust our money to banks we might be forgiven for thinking it will be safe. We ought to be surprised that a vast global institution can be organised in such a way that, according to the law, only one individual should bear personal responsibility and imprisonment for a loss of US$2.3 billion dollars. </p>
<p>Even with the most noble of intentions, our fallibility as humans is so well known that arguably no one individual should be in a position where they are solely responsible for that amount of other people’s money. Some might argue that such an event is rare. Yet this is not the case:</p>
<ol>
<li>Nick Leeson lost US$1.4 billion in 1995 and <a href="https://www.theguardian.com/business/from-the-archive-blog/2015/feb/24/nick-leeson-barings-bank-1995-20-archive">brought down Barings Bank</a>.</li>
<li>LTCM, a hedge fund run by finance professors, <a href="https://www.businessinsider.com/the-fall-of-long-term-capital-management-2014-7?IR=T">lost US$4.4 billion in 1998</a>.</li>
<li>John Rusnak <a href="https://www.irishtimes.com/business/financial-services/clean-living-the-man-who-cost-aib-691m-1.1925600">lost US$700m at AIB in 2002</a>.</li>
<li>Jerome Kerviel <a href="http://uk.businessinsider.com/how-jerome-kerviel-lost-72-billion-2016-5?r=US&IR=T">lost US$7.2 billion</a> at Société Générale in 2008.</li>
<li>Bruno Iksil, the JP Morgan trader known as the London Whale, <a href="https://www.theguardian.com/business/2017/jul/22/london-whale-charges-dropped-against-former-jp-morgan-traders">lost US$6.2 billion</a> in 2012</li>
</ol>
<p>And let’s not forget that the global financial crisis that ran from 2007-09 featured trillions of dollars in taxpayer funded bailouts of financial institutions around the world due to reckless risk taking by the majority of large financial institutions, encouraged by policymakers.</p>
<p>What many find surprising is that so few individuals go to jail as a result of bank losses. The UBS CEO, Oswald Grübel, <a href="https://www.theguardian.com/business/2011/sep/24/ubs-oswald-grubel-resigns-rogue">resigned</a> in the wake of the Adoboli scandal, without a bonus. But he was paid US$2.07m and allowed <a href="https://www.ubs.com/global/en/about_ubs/investor_relations/annualreporting/archive/_jcr_content/par/accordionbox_c1db/teaserbox_a17d/teaser_acb3/linklist/link_9f50.1760175435.file/bGluay9wYXRoPS9jb250ZW50L2RhbS9zdGF0aWMvZ2xvYmFsL2ludmVzdG9yX3JlbGF0aW9ucy9hbm51YWwyMDExL0FSMjAxMV9lLnBkZg==/AR2011_e.pdf">to retain his share options</a> [pdf]. This is the same person that was profiled by The Economist newspaper in 2009 under the headline <a href="https://www.economist.com/finance-and-economics/2009/11/19/ossies-casino">Ossie’s Casino</a>. Meanwhile, UBS was fined almost US$47m for failing to properly regulate Adoboli, but in fact costs such as these are borne by the pension funds of ordinary people that invest in large firms like UBS by default.</p>
<h2>Adoboli’s story</h2>
<p>I first met Adoboli in October 2016 at a discussion about ethics and risk management hosted by the <a href="https://www.cfauk.org">CFA UK</a>, which represents investment professionals. It was clear that his story made a considerable impression on the audience of fund managers and analysts present, so I invited him to tell his story to <a href="https://www.stir.ac.uk/about/faculties-and-services/stirling-management-school/postgraduate-taught-induction/msc-finance/">students</a> at the University of Stirling. Some clips of our conversation are included here.</p>
<p>The first thing you notice when you meet Adoboli for the first time is his desire to please those around him. The second thing you realise is how articulate and energetic he is. </p>
<p>He told us how he became a trader in January 2006. He joined the Exchange Traded Fund (ETF) desk in September 2006, then barely one year after, as queues formed outside Northern Rock bank in the UK, his boss resigned, leaving Adoboli and another colleague in charge of a US$50 billion portfolio. At this point, they had barely 30 months trading experience between them. He had no formal finance qualifications and had only attended a two-week basic course on bond and equity valuation. All other knowledge had been gleaned “by osmosis” from less than 20 months experience as a junior trader.</p>
<p><audio preload="metadata" controls="controls" data-duration="621" data-image="" data-title="Clip 1" data-size="14904692" data-source="Isaac Tabner" data-source-url="" data-license="CC BY-ND" data-license-url="http://creativecommons.org/licenses/by-nd/4.0/">
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<p>In the subsequent weeks and months of the deepening financial crisis he describes the fear experienced by him and his colleague as markets became more unpredictable. Their minimal knowledge was insufficient to prevent repeated daily losses of US$5m or more in what was supposed to be a hedged (without risk) portfolio. Whenever they asked senior managers for assistance, he says that they were told, “you are the experts so you need to figure it out”. At that stage in their career, they lacked confidence to evaluate what was possible or reasonable and to demand extra resources for what, in hindsight, was clearly an impossible situation for two junior traders to be in.</p>
<p>Eventually, an even less experienced trader was added to their team, but they had barely brought him up to their own level, when following losses from the financial crisis <a href="https://www.theguardian.com/business/2008/oct/16/ubs-creditsuisse">and a US$60 billion bailout</a> from the Swiss taxpayer, UBS decided to fire their junior to cut costs. The resulting fear for their own jobs made them less inclined than ever to ask senior managers for help, lest their own competence be questioned. Instead Adoboli describes working 20-hour days six days a week for two years between 2007 and 2009. </p>
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<p>Adoboli <a href="https://dealbook.nytimes.com/2012/11/09/jury-is-told-ex-ubs-trader-was-made-a-scapegoat-for-banks-woes/">recounts</a> how he was urged to take more risks and how in meetings, managers kept exhorting traders to push the boundaries harder to increase profits. As one trader asked: “How much harder can they go if they had made US$80m profit by April 2011 on four hours sleep per night?” The alleged response was: “You will only know if you have gone too far when you get a slap on the back of the wrist.” By June 2011 Adoboli’s team, now comprising four traders, had made US$132m profit in six months only to be told that their targets for the second half of the year would be US$198m. </p>
<p>If Adoboli’s figures are correct, in just six months his team of four traders made nearly 3% of the total profit earned by UBS in the whole of 2010 at a time when UBS employed 65,000 people. Why was no one asking how so much profit could be earned by just four people and how much risk was at stake? Why were they not given more resources to secure the profit without working 20 hours a day?</p>
<h2>Lessons learned</h2>
<p>If he could go back in time, Adoboli says he would have been more frank with his senior managers. Demanding their help and leadership. On ethics training, he recalled that the compliance team relied on computer-based training culminating in a tick box online test that everyone rushed to complete on at 5.00pm before going home. </p>
<p>A much better approach, he believes, is for employees to seek ethics training from independent professional accrediting institutions such as the <a href="https://www.cfainstitute.org">CFA Institute</a>. If ethical guidance is institutionally led, it is too easy for a senior manager to push you away from an institutionally-derived ethics code. But if you have earned accreditation by hard work and independent study accredited by an outside professional body, he believes you can hold this up as a shield against internal pressures to deviate.</p>
<p><audio preload="metadata" controls="controls" data-duration="85" data-image="" data-title="Clip 3" data-size="1069979" data-source="Isaac Tabner" data-source-url="https://www.theguardian.com/uk" data-license="CC BY-ND" data-license-url="http://creativecommons.org/licenses/by-nd/4.0/">
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<p>During our five hours together it became clear to me that no matter whether you choose to believe all of what Adoboli says, or only a small portion of it, there is a lot to learn from his experience. </p>
<p>Have you ever faced pressures at work that makes you feel a bit uncomfortable or seem to push the ethical boundaries? If you are inclined to avoid challenging authority for fear of being labelled “negative” or a “poor team player” and simply seek to deliver impossible tasks against the odds, let Adoboli’s story be a compelling example of what can go wrong.</p>
<p>But this should be a lesson for regulators too. Yet, to my astonishment, Adoboli told me that, despite the fines levied on UBS as a result of their <a href="https://www.bbc.co.uk/news/business-20492017">failure to adequately supervise him</a>, to this day, he has never once been interviewed by any regulator seeking to learn how to avoid his experience being repeated.</p>
<p>On the face of it, deporting a rogue trader with a criminal conviction for losing US$2.3 billion of his employer’s money might seem a politically savvy decision for a UK Home Office under pressure to limit net migration to the UK. But if this deportation goes ahead, Adoboli will be a huge loss to the UK. </p>
<p>I hope the Home Office will reverse its decision and allow future generations of students and business leaders to learn from Kweku Adoboli’s mistakes. Listening to him, it is easy to imagine how, with the lack of the right structures in place and given the wrong incentives, you can be led down such a path to disaster.</p><img src="https://counter.theconversation.com/content/102052/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Isaac T. Tabner does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
One person should not bear sole responsibility for a loss of US$2.3 billion at a global financial institution employing 65,000 people.
Isaac T. Tabner, Senior Lecturer in Finance, Director, MSc Finance, University of Stirling
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/97842
2018-06-26T10:41:20Z
2018-06-26T10:41:20Z
Bitcoin price manipulation puts trust in cryptocurrencies at risk
<p>Cryptocurrencies like bitcoin <a href="https://coingossip.club">have grown in popularity</a> in large part because they can be bought and sold without a government or other third party overseeing everything. But there’s a flipside: Unlike in markets for other assets such as stocks or bonds, it makes it much harder to uncover price manipulation and fraud.</p>
<p>But that’s what the Justice Department likely intends to do. In May, <a href="https://www.bloomberg.com/news/articles/2018-05-24/bitcoin-manipulation-is-said-to-be-focus-of-u-s-criminal-probe">it opened</a> a criminal investigation to examine whether there has been price manipulation in the cryptocurrency markets. While it wasn’t clear what time period investigators are looking at, it’s likely that they’re focusing on the <a href="https://charts.bitcoin.com/chart/price">sharp rise and fall</a> that occurred in late 2017 and early 2018. </p>
<p>The impact of illicit cryptocurrency trading could be large. For example, bitconnect, once the seventh-biggest digital coin, <a href="https://techcrunch.com/2018/01/16/bitconnect-which-has-been-accused-of-running-a-ponzi-scheme-shuts-down/">collapsed in a matter of hours</a> in January, <a href="https://metro.co.uk/2018/01/19/heartbroken-families-lose-life-savings-catastrophic-crash-bitconnect-cryptocurrency-7242067/">costing investors hundreds of millions of dollars</a> and eroding trust in legitimate cryptocurrencies. </p>
<p><a href="https://scholar.google.com/citations?user=JtTsVAkAAAAJ&hl=en&oi=ao">We</a> have been <a href="https://scholar.google.com/citations?user=h-ibfVYAAAAJ&hl=en&oi=ao">researching</a> digital currencies for the last several years. <a href="https://tylermoore.utulsa.edu/jme17.pdf">Our most recent paper</a>, published in the Journal of Monetary Economics earlier this year, found evidence of <a href="https://theconversation.com/how-can-criminals-manipulate-cryptocurrency-markets-97294">fraudulent behavior</a> in 2013 and 2014, when prices soared and then tumbled over several months. </p>
<p>Could the failure to root out and prevent this kind of abuse erode trust in digital currencies?</p>
<h2>Why cryptocurrency fraud matters</h2>
<p>First it’s worth considering why anyone should care about digital currencies. Their total market capitalization of about US$350 billion, for example, is just a fraction of the size of the <a href="http://www.businessinsider.com/global-market-cap-is-about-to-hit-100-trillion-2017-12">global stock market</a>, which is closing in on $100 trillion. </p>
<p>Still, cryptocurrencies have soared in value in a very short period of time, climbing from just $14 billion in January 2014. And since bitcoin became the first digital currency in 2009, hundreds have launched, with more than 800 active today. </p>
<p>While cryptocurrencies can in theory be used to purchase goods and services – they are called currencies after all – they must first attract large numbers of merchants and consumers, which hasn’t happened yet. That’s why, currently, crytocurrencies are primarily purchased as financial assets like stocks and bonds that buyers hope will appreciate in value over time. </p>
<p>But unlike currencies, financial assets have a tendency to fluctuate wildly. </p>
<p>And since investors without a lot of experience with risky assets <a href="https://www.financemagnates.com/forex/analysis/retail-investors-trading-crypto-highest-level-ever-monex-report/">are increasingly</a> purchasing cryptocurrencies, that puts them at risk when there’s a rapid rise and fall in prices.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/224086/original/file-20180620-137708-dko44p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/224086/original/file-20180620-137708-dko44p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/224086/original/file-20180620-137708-dko44p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/224086/original/file-20180620-137708-dko44p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/224086/original/file-20180620-137708-dko44p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/224086/original/file-20180620-137708-dko44p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/224086/original/file-20180620-137708-dko44p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Bitcoin trader Kolin Burges stands in protest outside an office building housing Mt. Gox, which housed a bitcoin exchange in Tokyo.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Japan-Bitcoin/e5b8d8298900474d822e30d7c52546ce/15/0">AP Photo/Shizuo Kambayashi</a></span>
</figcaption>
</figure>
<h2>Bitcoin’s first roller-coaster ride</h2>
<p>That’s what happened to the <a href="https://charts.bitcoin.com/chart/price">price of bitcoin</a> in 2013, when it jumped from around $150 in October to over $1,000 in December before dropping over 50 percent weeks later. By early 2014, several people who traded on Mt. Gox, the leading bitcoin currency exchange at the time, <a href="https://www.reddit.com/r/Bitcoin/comments/20k4zc/free_willy_identifying_the_gox_buy_bot/">had identified what they considered</a> “suspicious activity” on the exchange and <a href="https://www.coindesk.com/bot-named-willy-did-mt-goxs-automated-trading-pump-bitcoin-price/">wrote extensively</a> about it. </p>
<p>Our paper, titled “<a href="https://tylermoore.utulsa.edu/jme17.pdf">Price Manipulation in the Bitcoin Ecosystem</a>,” examined this suspicious trading activity. </p>
<p>We were able to conduct the analysis because when Mt. Gox collapsed in early 2014, its transaction history data got leaked. This gave researchers like us access to approximately 18 million transactions from April 2011 to November 2013. The key is that these data linked transactions to user accounts – though not their real identities. With this information, we were able to link suspicious trades to accounts.</p>
<p>Our analysis of the data confirmed much of what was reported in the “anonymous” documents. In the <a href="https://tylermoore.utulsa.edu/jme17appendix.pdf">paper’s appendix</a>, we go into great detail to show why two trading mechanisms in particular should be considered suspicious. The first, known as the “Markus bot,” involved reporting trades that did not exist. The second, or “Willy bot,” involved trades in which Mt. Gox itself bought bitcoins from its own customers but did not let many of them withdraw the proceeds from their accounts.</p>
<p>In a trial in Japan in 2017, former Mt. Gox CEO Mark Karpeles <a href="https://cointelegraph.com/news/mt-gox-trial-update-karpeles-admits-willy-bot-existence">confirmed</a> that the exchange operated the “Willy” accounts and that the trades were issued automatically. </p>
<p>The trading activity of these bots led to significantly increased trade at Mt. Gox and other exchanges as well. As a result, prices rose when the bots were active.</p>
<p>We believe this is one type of suspicious trading that will likely be investigated by the Justice Department following the massive rise and fall in the price of bitcoin that occurred around the end of 2017. </p>
<h2>Investors go for another ride</h2>
<p>Last year was a banner one for cryptocurrencies, particularly bitcoin, which soared from $1,000 at the end of 2016 to a peak of over $19,000 in December. </p>
<p>The real spike, however, came in November when the <a href="https://charts.bitcoin.com/chart/price">price tripled</a> in less than a month. The euphoria was over as quickly as it started as bitcoin plunged to $7,000 by February.</p>
<p>University of Texas finance professors John M. Griffin and Amin Shams released an SSRN working paper in June <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3195066">concluding</a> that price manipulation likely led to more than 50 percent of the meteoric rise in bitcoin in 2017. Their focus was on the flow of bitcoin going in and out of Bitfinex, which according to an <a href="https://www.nytimes.com/2018/06/13/technology/bitcoin-price-manipulation.html">article</a> in The New York Times is one of the largest and least regulated exchanges in the industry. </p>
<p>Beyond bitcoin, the potential for price manipulation is even higher in digital currencies with much less trading volume.</p>
<h2>Moving forward</h2>
<p>Commenting about the market for digital coin offerings – where cryptocurrencies go public – Security and Exchange Commission Commissioner Robert Jackson <a href="https://www.cnbc.com/2018/04/30/sec-is-cautious-but-open-to-crypto-fundraising-commissioner-says.html">remarked</a> in April that “investors are having a hard time telling the difference between investments and fraud.” </p>
<p>The challenge for investigators and others in detecting price manipulation today is that there isn’t sufficient transparency about trading patterns of individuals, as there is in more regulated assets like stocks and bonds traded on stock exchanges like the Dow Jones and Nasdaq. In our research, we were fortunate to have internal trading data made public following Mt. Gox’s collapse. We do not have the same luxury today. </p>
<p>The key lesson is that cryptocurrency markets need increased cooperation between financial regulators and trading platforms. For example, exchanges could be required to share information about the trading behavior of individuals with very large positions. This would help ensure that the trades taking place are in fact legitimate and reflect real sales. </p>
<p>The consequence of not taking steps in this direction is likely a loss of faith in cryptocurrencies.</p><img src="https://counter.theconversation.com/content/97842/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Neil Gandal has received funding for this from the following grants for this research project:
The US-Israel Binational Science Foundation and
The Blavatnik Interdisciplinary Cyber Research Center at Tel Aviv University.
Neil Gandal is a Research Fellow at the Centre for Economic Policy Research (CEPR)
</span></em></p><p class="fine-print"><em><span>Tyler Moore receives funding from US National Science Foundation
Award No. 1714291. He is the director of StopBadware and an Editor in Chief of the Journal of Cybersecurity. </span></em></p>
Evidence of past price manipulation of bitcoin and the just-launched Justice Department investigation highlight the need to take steps against cryptocurrency fraud.
Neil Gandal, Professor of Economics, Tel Aviv University
Tyler Moore, Assistant Professor of Computer Science and Tandy Chair of Cyber Security and Information Assurance, University of Tulsa
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/73483
2017-07-12T09:28:24Z
2017-07-12T09:28:24Z
How loneliness in older people makes them more vulnerable to financial scammers
<figure><img src="https://images.theconversation.com/files/174296/original/file-20170618-18169-6wao60.jpg?ixlib=rb-1.1.0&rect=0%2C183%2C4896%2C2924&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/elderly-woman-looks-out-window-249281512?src=o3Ec9b4_x6DPq5SUHjcnKQ-1-8">Marlinde/shutterstock.com</a></span></figcaption></figure><p>Fraud investigators have warned that people are being targeted by scammers who persuade them to invest their pensions in self-storage units. The UK’s Serious Fraud Office <a href="https://www.sfo.gov.uk/2017/05/22/sfo-seeks-information-from-investors-in-storage-pod-schemes/">launched an investigation</a> in May, saying that a thousand people had invested around £120m into the schemes. </p>
<p>This is just the latest <a href="https://www.ncoa.org/economic-security/money-management/scams-security/top-10-scams-targeting-seniors/">in a line</a> of financial scams to emerge, many of which target older people. And sadly, loneliness increases the risk of being <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2804623/">targeted by unscrupulous predators</a>, including financial scammers. </p>
<p>For some people, their only form of social contact comes from communication with commercial organisations or scammers. These can include telemarketing phone calls or letters from “clairvoyants”, prize draws or catalogues. Strong relationships can develop <a href="https://www.researchgate.net/publication/236964907_The_Importance_of_Consumer_Market_Interactions_as_a_Form_of_Social_Support_for_Elderly_Consumers">between the victims and perpetrators</a> of financial scams who maintain a high level of contact. </p>
<p>Some people can receive multiple phone calls each day or large amounts of scam mail in the post. The <a href="http://www.nationaltradingstandards.uk/work-areas/scams-team/">National Trading Standards scams team</a>, who we are conducting research with, have told us of victims who receive over 30 pieces of mail a day. Responding to the quantity of calls and mail can become an administrative job that provides routine and purpose, which may be highly valued by the scam victim whose time would otherwise be unstructured. </p>
<p>A sense of a personal relationship with the correspondents often develops, and the value of this relationship to the victim may outweigh the potential financial cost of the scam. Lonely people have fewer opportunities <a href="http://www.ageuk.org.uk/documents/en-gb/for-professionals/consumer-issues/age%20uk%20only%20the%20tip%20of%20the%20iceberg%20april%202015.pdf?dtrk=true">to meet with others</a> to discuss finances or scams and are therefore unable to check with a trusted contact whether an offer, or relationship, is genuine.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/175402/original/file-20170623-17502-1lvadu3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/175402/original/file-20170623-17502-1lvadu3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/175402/original/file-20170623-17502-1lvadu3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/175402/original/file-20170623-17502-1lvadu3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/175402/original/file-20170623-17502-1lvadu3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/175402/original/file-20170623-17502-1lvadu3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/175402/original/file-20170623-17502-1lvadu3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Daily calls target people who have little other social contact.</span>
<span class="attribution"><span class="source">via shutterstock.com</span></span>
</figcaption>
</figure>
<p>Financial scammers are skilled at using marketing techniques to establish rapport and familiarity with victims. The language used is persuasive and personal, deliberately designed to appeal to <a href="http://longevity.stanford.edu/blog/2011/10/12/consumer-vulnerability-to-scams-swindles-and-fraud-a-new-theory-of-visceral-influences-on-persuasion/">the human need for social contact</a>. </p>
<p>The loneliness of some scam victims can be <a href="http://journals.sagepub.com/doi/abs/10.1177/0269758015571471">exacerbated</a> by feelings of shame and embarrassment, reinforced by <a href="https://www.fraudhelpdesk.org/debunking-three-myths-fraud-victims/">language</a> sometimes associated with scam victims such as “stupid”, “gullible” or “greedy”. Such words suggest they are culpable, rather than a victim in need of support. This can influence victims’ willingness and ability to report their experience, and may be part of the reason why scamming is an under-reported crime. Because of this, agencies must respond to scam victims <a href="http://staffprofiles.bournemouth.ac.uk/display/journal-article/196931">in a supportive way</a>, sensitive to the reasons why the individual may have become involved.</p>
<h2>Tackle loneliness to beat scammers</h2>
<p>The research we are doing in collaboration with the scams team is looking at the experiences of victims. We are also identifying effective interventions and producing good practice guides for professionals working with victims and potential scam targets. One way to disrupt and prevent financial scams is to identify the reasons – such as loneliness – why people are drawn in by them. </p>
<p>Loneliness exposes people to a diverse range of significant risks to <a href="https://link.springer.com/article/10.1007/s00127-014-0951-8">mental and physical well-being</a>. It affects people of all ages, but is often triggered by <a href="http://discovery.ucl.ac.uk/1639/">particular life events</a> such as bereavement, poor health, or cognitive impairment. Three in ten people aged over 80 in the UK report <a href="https://webcache.googleusercontent.com/search?q=cache:dx91KcUIStsJ:https://www.ons.gov.uk/peoplepopulationandcommunity/wellbeing/articles/measuringnationalwellbeing/2015-10-01/pdf+&cd=3&hl=en&ct=clnk&gl=uk">feelings of loneliness</a> – higher than any other age group.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/174302/original/file-20170618-28802-e8ua9q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/174302/original/file-20170618-28802-e8ua9q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=455&fit=crop&dpr=1 600w, https://images.theconversation.com/files/174302/original/file-20170618-28802-e8ua9q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=455&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/174302/original/file-20170618-28802-e8ua9q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=455&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/174302/original/file-20170618-28802-e8ua9q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=572&fit=crop&dpr=1 754w, https://images.theconversation.com/files/174302/original/file-20170618-28802-e8ua9q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=572&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/174302/original/file-20170618-28802-e8ua9q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=572&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Preventing loneliness could stop the scammers.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/edlerly-mom-sharing-laugh-her-visiting-139072550?src=gz2sk1oFzdQKOFHpgVb7YA-1-67">intoit/shutterstock.com</a></span>
</figcaption>
</figure>
<p>Building on <a href="https://www.cambridge.org/core/journals/ageing-and-society/article/div-classtitlepreventing-social-isolation-and-loneliness-among-older-people-a-systematic-review-of-health-promotion-interventionsdiv/06510CBA74BBCF3FD2821BB96525647C">previous research</a>, we found that successful interventions aimed at alleviating loneliness are those that focus on well-being and promoting ways of developing a person’s resilience and social networks. </p>
<p>Facilitating <a href="http://www.who.int/ageing/age_friendly_cities_guide/en/">social engagement</a> in community activities to promote older people’s self-esteem can help build <a href="https://www.cambridge.org/core/journals/ageing-and-society/article/resilience-thoughts-on-the-value-of-the-concept-for-critical-gerontology/7E49BB754E9F00642DE0EADB53675E58">their resilience</a>. This can then reduce the likelihood that they will respond to scams. Empowering people to safeguard themselves against scams through increased awareness is equally important. Groups set up to promote financial awareness and literacy can help, as can learning materials produced by initiatives such as <a href="https://www.friendsagainstscams.org.uk/">Friends Against Scams</a> and <a href="http://scamsmart.fca.org.uk/">Scamsmart</a>. </p>
<p>It is estimated that £5-10 billion is <a href="http://www.rand.org/content/dam/rand/pubs/research_reports/RR1500/RR1510/RAND_RR1510.pdf">lost annually</a> by victims of scams, with the average age of a victim being 75. In an ageing society, the number of people over 65 living on their own in England is <a href="http://www.poppi.org.uk/">projected</a> to increase from 3.5m in 2015 to 4.97m in 2030. This means that unless society makes a concerted effort to tackle loneliness, significantly more people could be at increased risk of being scammed – it is detrimental to their health and the well-being and the economy.</p><img src="https://counter.theconversation.com/content/73483/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee-Ann Fenge receives funding from New Dynamics of Ageing (a unique collaboration between five UK Research
Councils—Economic and Social Research Council, Engineering and Physical Sciences Research Council, Biotechnology and Biological Sciences Research Council, Medical Research Council and Arts and Humanities Research Council), and the Big Lottery Fund.</span></em></p><p class="fine-print"><em><span>Keith Brown and Sally Lee do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Scammers target people who crave social contact.
Keith Brown, Director of the Centre for Post Qualifying Social Work, Bournemouth University
Lee-Ann Fenge, Professor of Social Care, Bournemouth University
Sally Lee, Post-Doctoral Research Fellow, Bournemouth University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/80353
2017-07-11T01:05:35Z
2017-07-11T01:05:35Z
Why we need to save the Consumer Financial Protection Bureau
<p>Republicans in <a href="https://www.forbes.com/sites/jimhenry/2017/05/30/congressional-critics-gunning-for-consumer-financial-protection-bureau/#24b1e09167ab">Congress</a> and the <a href="https://consumerist.com/2017/03/20/white-house-wants-authority-to-fire-consumer-protection-chief/">White House</a> have been very blunt about their desire to gut the <a href="https://www.consumerfinance.gov">Consumer Financial Protection Bureau</a> (CFPB). </p>
<p>The agency was launched in 2011 in the aftermath of the financial crisis as part of the <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">Dodd-Frank Wall Street Reform and Consumer Protection Act</a>. The goal was to protect consumers from deceptive or misleading practices in the financial industry. </p>
<p>So what would you miss if the CFPB suddenly disappeared?</p>
<p>In short, a lot, including a <a href="http://thehill.com/policy/finance/341313-consumer-bureau-releases-rule-to-prevent-banks-credit-card-firms-from-blocking">just-issued rule</a> that would prevent financial companies from using arbitration clauses to prevent people from having their day in court. </p>
<p>We base this conclusion on the work the three of us have done in recent decades. One of us (Sovern) has been writing about consumer law for more than 30 years, while the other two direct a <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">legal clinic that represents elderly consumers</a>. We’ve seen the worst of what financial companies can do, and we’ve also witnessed how the CFPB has begun to reverse the tide. </p>
<h2>Life before CFPB</h2>
<p>If you are one of the more than 29 million consumers who have collectively <a href="https://www.consumerfinance.gov/">received nearly US$12 billion</a> back from misbehaving financial institutions because of the CFPB’s efforts, you already know its value. But even if you are not, you have probably benefited from the bureau’s existence.</p>
<p>Before Congress created the bureau, there was no federal agency that made consumer financial protection its sole mission. Rather, consumer protection was rolled into the missions of a bunch of different agencies. And, as we saw during the financial crisis, regulators often gave it a back seat.</p>
<p>Congress, for example, gave the Federal Reserve the <a href="https://www.federalreserve.gov/reportforms/formsreview/RegZ_20080730_ffr.pdf">power to bar unfair and deceptive mortgage lending</a> in 1994. Yet the central bank considered consumer protection a backwater and didn’t use that power until 2008 – too late to prevent the <a href="https://theconversation.com/us/topics/great-recession-13707">Great Recession</a>. Congress took it away two years later when it passed Dodd-Frank.</p>
<p>The Office of the Comptroller of the Currency (OCC) regulates banks but was so preoccupied with ensuring lenders were safe that it failed to protect consumers from their predatory subprime mortgages – so much so that it prevented states from doing so too. And the Federal Trade Commission, which is tasked with fighting deceptive business practices, lacked the power to prevent such <a href="https://www.federalreservehistory.org/essays/subprime_mortgage_crisis">dangerous lending</a>.</p>
<p>This meant consumer protection on financial matters fell through the cracks. </p>
<p><a href="https://theconversation.com/how-wells-fargo-encouraged-employees-to-commit-fraud-66615">Wells Fargo’s recent fraud scandal</a> is a case in point. In the early 2000s, Wells Fargo employees <a href="https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/presentations/2017/board-report.pdf">began opening fake accounts</a> in clients’ names without permission, leading in some cases to <a href="https://www.wsj.com/articles/wells-fargo-is-trying-to-fix-its-rogue-account-scandal-one-grueling-case-at-a-time-1482855852?mg=prod/accounts-wsj%20rt5y7u6">lower credit scores</a> and a variety of fees. The bank <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2961347">ultimately opened millions of fraudulent bank and credit card accounts</a> before the scheme came to an end last year. </p>
<p>But as early as 2010, before the CFPB was set up, regulators at the OCC were increasingly aware of what was happening at Wells Fargo thanks to hundreds of <a href="https://theconversation.com/why-companies-like-wells-fargo-ignore-their-whistleblowers-at-their-peril-67501">whistleblower complaints</a>. The OCC even confronted the bank yet failed to take any action despite many red flags, according to an <a href="https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-wells-fargo-supervision-lessons-learned-41917.pdf">internal audit</a>. </p>
<p>It wasn’t until the <a href="http://freepdfhosting.com/29677883a9.pdf">Los Angeles city attorney</a> and the <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">CFPB became involved</a> years later that Wells Fargo took forceful action to stop the fraud. The regulators <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">fined Wells Fargo a total of $185 million</a> and forced it to refund fees it had charged customers and hire an independent consultant to review its procedures. </p>
<p>More importantly, they sent a clear message to other financial institutions: Cheat consumers and you will face the consequences.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=440&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=440&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=440&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=553&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=553&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=553&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Consumer Financial Protection Bureau Director Richard Cordray testifies on Capitol Hill in 2013.</span>
<span class="attribution"><span class="source">AP Photo/Manuel Balce Ceneta</span></span>
</figcaption>
</figure>
<h2>Protecting consumers</h2>
<p>Since its inception, the bureau has acted repeatedly to stop financial institutions from harming consumers. </p>
<p>It blocked debt collector attorneys from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-halt-illegal-debt-collection-practices-lawsuit-mill-and-debt-buyer/">suing consumers based on false information</a>. It discovered systemic problems with consumer credit reports and forced companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-oversight-uncovers-and-corrects-credit-reporting-problems/">correct errors</a>. It compelled credit card companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-subprime-credit-card-company-to-refund-2-7-million-for-charging-illegal-credit-card-fees/">refund illegal fees</a>. It protected borrowers from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-nations-largest-student-loan-company-navient-failing-borrowers-every-stage-repayment/">unlawful student loan servicing practices</a>. It <a href="https://www.consumerfinance.gov/about-us/blog/ally-to-repay-80-million-to-consumers-it-discriminated-against/">made lenders repay</a> consumers they discriminated against. It <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-recovers-more-than-1-million-for-servicemembers-veterans-and-their-families/">recovered money for veterans</a> who complained of abusive financial practices. </p>
<p>When the bureau began publishing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">consumer complaints on its website</a>, companies that might previously have ignored negative feedback paid attention. Financial institutions have responded to complaints to the CFPB <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">more than 700,000 times</a>, often by providing a remedy to the consumers.</p>
<p>Besides protecting consumers, however, Congress had a second motive in creating the bureau: to help prevent the kind of mortgage lending that helped cause the Great Recession. </p>
<p>To that end, the bureau has adopted <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/">rules</a> that help consumers to understand their mortgages – something that often <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1531781">wasn’t possible</a> under the previously misleading mortgage disclosures. It also issued <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/ability-repay-and-qualified-mortgage-standards-under-truth-lending-act-regulation-z/">regulations</a> to prevent consumers from taking out mortgages that they couldn’t repay. And after borrowers take out a mortgage, <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z-mortgage-servicing-final-rules/">CFPB servicing rules</a> establish the procedures servicers must follow when communicating with borrowers, correcting errors, providing information and dealing with loan modification requests.</p>
<p>Two of us have personal experience with one of the bureau’s new mortgage rules, which powerfully illustrates the value of the CFPB.</p>
<p>In 2014, Alice, a client of our law school clinic, was struggling to pay the mortgage on her home – which she had refinanced a few years earlier – after a stroke forced her into retirement. <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">Our clinic</a> helped her apply for a modification of her loan. </p>
<p>But within weeks, instead of acknowledging Alice’s application, the loan servicer summoned her to court to begin foreclosure proceedings in violation of <a href="https://www.law.cornell.edu/cfr/text/12/1024.41">CFPB servicing rules</a>. Fortunately, our clinic was able to rely on those rules in getting the foreclosure action dismissed. Alice got her loan modified and remains in her home. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=482&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=482&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=482&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=606&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=606&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=606&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Demonstrators tried to draw attention to the subprime mortgage crisis back in early 2008.</span>
<span class="attribution"><span class="source">AP Photo/Matt Rourke</span></span>
</figcaption>
</figure>
<h2>Protecting the vulnerable</h2>
<p>This reveals how the bureau is particularly important to protect vulnerable consumers, like the elderly, who are frequently targeted by fraudsters and predatory lenders because of their cognitive and other impairments and because they often have accumulated substantial assets. The CFPB is the only federal agency with an office <a href="https://www.consumerfinance.gov/educational-resources/resources-for-older-adults/">specifically dedicated</a> to protecting the financial well-being of older adults. </p>
<p>The bureau has brought cases against companies that attempted to take advantage of seniors by, for example, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-and-new-york-department-of-financial-services-sue-pension-advance-companies-for-deceiving-consumers-about-loan-costs/">misrepresenting the interest rates</a> on pension advance loans or <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-reverse-mortgage-companies-deceptive-advertising/">deceptive advertising</a>. In 2015 alone, consumer complaints to the CFPB brought relief to <a href="https://data.consumerfinance.gov/dataset/Consumer-Complaints/s6ew-h6mp">more than 600 older Americans just through debt collection problems</a>.</p>
<p>The bureau has also worked to prevent financial abuse of the elderly, estimated to cost seniors <a href="https://www.truelinkfinancial.com/research">as much as $36 billion annually</a>. The CFPB has educated <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-advisory-and-report-for-financial-institutions-on-preventing-elder-financial-abuse/">financial institutions</a>, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-helps-assisted-living-and-nursing-facilities-protect-seniors-from-financial-abuse/">nursing facilities</a> and <a href="https://www.consumerfinance.gov/about-us/newsroom/director-cordray-remarks-on-money-smart-for-older-adults/">others</a> about recognizing and stopping elder financial abuse and exploitation.</p>
<h2>Consumer protection in peril</h2>
<p>Given Alice’s ill health, the consequences for her might have been disastrous if she had been thrown out of her home. But now she – and all of us – face the loss of the CFPB’s aid. </p>
<p>The CFPB <a href="http://www.latimes.com/business/la-fi-cfpb-cordray-hearing-20170405-story.html">is under attack</a> from Republican members of Congress who <a href="https://banks.house.gov/media/press-releases/banks-votes-choice-act-roll-back-dodd-frank-law">believe more in bank protection</a> than consumer protection. Some members have <a href="http://pubcit.typepad.com/clpblog/2017/02/ratcliffecruz-bill-would-eliminate-the-cfpb.html">proposed eliminating the agency altogether</a>. </p>
<p>The House of Representatives <a href="https://financialservices.house.gov/choice/">has passed a bill</a> that would cripple the CFPB by, for example, taking away the power it used to fine Wells Fargo for opening illegal accounts and concealing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">its complaint database</a> from public view. In other words, it would force the bureau to sit idly by as financial institutions <a href="http://www.newsweek.com/your-bank-lying-you-619814">lie to consumers</a>. </p>
<p>Nearly every American has or will have a loan or bank account, a prepaid card, credit card, a credit report or some combination of those, and so has dealings with a financial institution policed by the CFPB. But <a href="http://press.princeton.edu/titles/10267.html">few of us read the fine print</a> governing these things or <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2516432">can understand it when we do</a>. That gives the companies that write these agreements the ability to draft them to suit their own interests at the expense of consumers. </p>
<p>Similarly, we do not always know when a financial institution takes advantage of us, just as Wells Fargo customers did not always know that it had opened unauthorized accounts that lowered their credit scores. </p>
<p>Consumers need protection from misbehaving companies. If the bureau is eliminated or significantly weakened, all consumers will suffer.</p><img src="https://counter.theconversation.com/content/80353/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Along with three co-authors, Jeff Sovern received a $29,510 grant from the American Association for Justice Robert L. Habush Endowment and by a grant from the St. John’s University School of Law Hugh L. Carey Center for Dispute Resolution in 2014 to study arbitration. It resulted in an article. Along with Professor Kate Walton, he received a grant from the National Conference of Bankruptcy Judges Endowment for Education to study debt collection, resulting in another article. He is a member of the National Association of Consumer Advocates. </span></em></p><p class="fine-print"><em><span>Ann L. Goldweber is affiliated with NACA as a member.</span></em></p><p class="fine-print"><em><span>Gina M. Calabrese is affiliated with the National Association of Consumer Advocates, New Yorkers for Responsible Lending, and the Association of the Bar of the City of New York (Chair, Committee on the Civil Court).</span></em></p>
Republicans are hoping to eliminate or at least defang the only federal agency tasked solely with protecting consumers from financial abuses. What would we miss if they succeed?
Jeff Sovern, Professor of Law, St. John's University
Ann L. Goldweber, Professor of Clinical Education, St. John's University
Gina M. Calabrese, Professor of Clinical Education, St. John's University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/74311
2017-03-09T14:48:42Z
2017-03-09T14:48:42Z
Your brain is unique – here’s how it could be used as the ultimate security password
<figure><img src="https://images.theconversation.com/files/160165/original/image-20170309-21050-weeuz8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Think to log in, please.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/people-technology-travel-tourism-concept-close-519449284?src=dEfStM4K3EkWxdZq_JtyJw-1-36">Syda Productions/Shutterstock</a></span></figcaption></figure><p>Biometrics – technology that can recognise individuals based on physical and behavioural traits such as their faces, voices or fingerprints – are becoming increasingly important to combat financial fraud and security threats. This is because traditional approaches, such as those based on PIN numbers or passwords, are proving too easily compromised. For example, <a href="https://theconversation.com/the-rise-of-biometric-banking-as-fight-against-fraud-is-stepped-up-31433">Barclays has introduced TouchID</a>, whereby customers can log onto internet banking using fingerprint scanners on mobile phones. </p>
<p>However, this is not foolproof either – it is possible to forge such biometrics. Fingers can after all be chopped off and placed by impostors to gain fraudulent access. It has also been shown that prints lifted from glass using cellophane tape can be used with gelatine to create fake prints. So there is a real need to <a href="https://theconversation.com/when-your-body-becomes-your-password-the-end-of-the-login-is-nigh-39092">come up with more advanced biometrics</a> that are difficult or impossible to forge. And a promising alternative is the brain. </p>
<p>Emerging biometric technology based on the electrical activity of the brain have indeed shown potential to be fraud resistant. Over the years, a number of research studies have found that <a href="http://dx.doi.org/10.1049/iet-bmt.2014.0040">“brainprints” (readings of how the brain reacts to certain words or tasks) are unique to individuals</a> as each person’s brain is wired to think differently. In fact, the brain can be used to identify someone from a pool of 102 users <a href="http://dx.doi.org/10.1109/TPAMI.2007.1013">with more than 98% accuracy</a> at the moment, which is very close to that of fingerprints (99.8% accuracy). </p>
<p>More recently, this has been confirmed by functional magnetic resonance imaging (fMRI), which measures brain activity by tracking changes in blood flow. A study using fMRI data from the Human Connectome Project was able to recognise individuals with up to 99% accuracy <a href="http://dx.doi.org/doi:10.1038/nn.4135">when performing certain mental tasks</a> such as relaxing, listening to a story, computing maths, looking at emotional faces or imagining moving parts of their body. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/160164/original/image-20170309-21039-9ziqml.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/160164/original/image-20170309-21039-9ziqml.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/160164/original/image-20170309-21039-9ziqml.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/160164/original/image-20170309-21039-9ziqml.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/160164/original/image-20170309-21039-9ziqml.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/160164/original/image-20170309-21039-9ziqml.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/160164/original/image-20170309-21039-9ziqml.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Fingerprints are commonly used.</span>
<span class="attribution"><span class="source">Barclays</span></span>
</figcaption>
</figure>
<p>However, the cost and difficulty of using fMRI (you have to lie very still in the scanner for a fairly long time) means it is clearly not practical for everyday biometric authentication. For that reason, researchers <a href="http://dx.doi.org/doi:10.1109/TIFS.2016.2543524">have instead looked at electroencephalography</a> (EEG), which uses electrodes to track and record brain-wave patterns. But this is also cumbersome – who would be willing to wear a cap of gel-based electrodes just to log in to their computer? Hence, the technology has remained in the realm of science fiction for some time. </p>
<h2>Promising alternatives</h2>
<p>Recently, technological advances in recording EEG from the ear using electrodes placed on the surface of standard earphones <a href="http://dx.doi.org/doi:10.1109/EMBC.2016.7591112">have provided a solution</a> – no gel needed. It is not easy though – EEG is very “noisy” since the brain is always actively processing different information. But advanced signal-processing approaches have recently been able to reduce the noisy components, albeit this typically requires powerful computing. This is, however, becoming less of a problem now that mobile-phone processing power is growing rapidly – it should in theory be possible to perform all the required processing on a smart phone. </p>
<p>So why aren’t brainprints everywhere already? One downside is that it can’t be used by twins – they have near-identical EEG patterns. But the main problem is the lack of stability of brainprints over time. </p>
<p>It seems that it is not enough to just have an EEG done once – occasional re-enrolment (say, monthly) is necessary. This is because the brain connections exhibit plastic behaviour (they change with experience) and thought processes in the brain change over time. However, in <a href="http://dx.doi.org/doi:10.1007/978-3-319-28658-7_15">ongoing work at the University of Kent</a>, we have shown that specific tones (which can be played using earphones) can be used to minimise these changes. It is not yet clear exactly how these tones affect the brain but we speculate that they may allow the brain to calm down, allowing more focused activity.</p>
<p>Two-factor authentication is now a norm for many banking transactions, for example using a password and an additional code sent to the phone. Soon, banks in New York <a href="http://www.dfs.ny.gov/about/press/pr1609131.htm">may have to comply with multi-factor authentication protocol</a> proposed by the New York State Department of Financial Services, whereby at least three authentication mechanisms are used for enhanced security by personnel accessing internal systems with privileged access or to support functions including remote access. </p>
<p>While fingerprints and voice recognition are possibilities, thought-based biometric technology is more apt to be used as an add-on to meet this new cybersecurity regulation. The brain biometric template could even be updated for a different mental activity should there be a security breach on the stored template (unlike a fingerprint biometric which remains for life and cannot be replaced once compromised).</p>
<p>Brainprints can also be used to generate passwords that can replace conventional alphanumeric passwords or PINs in ATM machines to withdraw cash. For example, rather than keying in the PIN, one would connect earphones and be shown a series of PIN numbers on the ATM screen. Brain patterns would change when the correct PIN number showed up – activating the transaction. By doing so, one does not have to worry about others looking over the shoulder to steal the PIN. Moreover, under coerced situations, brainprints will not work due to the stress – making them even more fraud resistant. </p>
<p>Given that it is difficult to copy another person’s exact thought process, the technology is certainly advantageous. Considering the advancement in the technology, we will likely see uptake of biometric applications based on brainprints soon – especially as part of multi-factor system for enhanced authentication. So don’t be surprised to see EEG earphones appearing in your post from the bank shortly.</p><img src="https://counter.theconversation.com/content/74311/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Palaniappan Ramaswamy does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
It may sound like science fiction, but research shows that all you really need to develop brain biometrics is a set of earphones.
Palaniappan Ramaswamy, Reader in Signal Analysis, University of Kent
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/73570
2017-03-06T02:15:36Z
2017-03-06T02:15:36Z
Why Wall Street is like a used car lot
<p>In 1792, before there was the internet, the telephone or even the telegraph, securities trading began on Wall Street. </p>
<p>A small group of dealers, <a href="http://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1790/1792_0517_NYSEButtonwood.pdf">who met under a buttonwood tree on Wall Street</a>, agreed to trade only with each other and established a minimum fee for their service. At that time, most trading involved the buying and selling of government bonds.</p>
<p>A quarter-century later, on March 8, 1817, securities dealers changed their rules a bit, moved into bigger quarters on Wall Street and officially created the New York Stock and Exchange Board. This was later shortened to the New York Stock Exchange (NYSE). Today it is the <a href="http://www.investopedia.com/terms/n/nyse.asp">largest securities exchange</a> in the world, trading around <a href="http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=3140&category=3">US$200 billion</a> each day, mainly stock certificates or ownership shares in private firms. The value of all the companies on the NYSE, about $16 trillion, comes close to the value of what the U.S. economy produces in new goods and services each year.</p>
<p>As the NYSE marks this bicentennial milestone, it is worth asking, what do stock markets actually do? </p>
<p>This question is particularly apt right now as U.S. shares set new records on a regular basis, with <a href="https://www.theatlantic.com/business/archive/2017/01/trump-bump/513698/">some</a> calling the roughly 15 percent gain in the Standard & Poor’s 500 since Election Day a “Trump bump” created by optimism about his plans, while others chalk it up to “irrational exuberance,” to use a famous phrase of Alan Greenspan, former chair of the Federal Reserve. </p>
<p>Based on my many years of experience teaching and writing about <a href="https://www.jstor.org/stable/3487115?seq=1#page_scan_tab_contents">financial markets and frauds</a>, the best way to understand what’s really happening on Wall Street – and puncture its mystique – is to imagine a used car dealership. </p>
<h2>The aura of the NYSE</h2>
<p>The NYSE gets its aura from the fact that so much money is involved. Even for those with a relatively small stock portfolio, a change in stock prices of 2 to 3 percent can result in gains or losses amounting to thousands of dollars. </p>
<p>Also, people are attracted by simple numbers, especially ones that fluctuate and get reported regularly with much fanfare, such as <a href="http://articles.mcall.com/2005-09-11/news/3616708_1_gasoline-prices-gas-prices-price-surge">gasoline</a> and stock prices.</p>
<p>More importantly, the NYSE helps finance new investment. When a large company wants to expand, it prints up new shares of stock and then tries to sell them. If successful, the company gets money (fresh capital) that enables it to expand its operations. This is what Snap Inc. – maker of the Snapchat app – <a href="http://www.reuters.com/article/us-snap-ipo-idUSKBN1690I7">did on March 2</a>, when it raised $3.4 billion in its initial public offering. </p>
<p>However, this is not what most stock trading is about. Virtually all the activity on the NYSE involves someone who already owns part of a company (represented by stock certificates) selling it to somebody else. </p>
<p>In this way it is very much like a used car dealership. Used car dealers buy old cars and resell them. Similarly, stock markets are places where someone sells her part ownership in a company to a dealer, who then finds someone else to buy it. </p>
<p>That is it. Ownership of a company changes hands, with the exchange serving as the middleman or used car dealer. Other than at the dealership, which makes some money on the trade, no jobs get created and no production takes place. </p>
<h2>Of liquidity and lemons</h2>
<p>From this perspective, stock exchanges like the NYSE have some positives as well as some negatives. </p>
<p>On the positive side, markets let us sell things quickly. When I want to get rid of my car, it is more convenient to have a used car dealer serve as an intermediary than for me to sell it myself. In addition, because it is easy to sell my car every few years, I may purchase a new car more frequently, which increases consumer spending and strengthens the economy. Similarly, it is easier for companies to raise money for new investment when the buyer knows he can resell the shares easily. In Wall Street parlance, this is called “liquidity.” </p>
<p>But there are also negatives. First, as all used car buyers know, it is <a href="http://abcnews.go.com/GMA/story?id=126960&page=1">easy to end up with a lemon</a>. Most people don’t know the specifics of a particular car or a specific company. In both cases, there are incentives for sellers – the car dealers or investment advisers – to hide any flaws in what they want to sell, thereby deceiving buyers. Commissions for making sales is more important for these people than helping a buyer make a good decision. </p>
<p>The history of financial markets is also a <a href="http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470601809.html">history of fraud</a>, from the <a href="https://www.library.hbs.edu/hc/ssb/history.html">South Sea Bubble</a> of the early 18th century to <a href="http://www.businessinsider.com/how-bernie-madoffs-ponzi-scheme-worked-2014-7">Bernie Madoff’s Ponzi scheme</a> in the 2000s. </p>
<p>Second, financial markets (unlike used car markets) tend to generate speculative excess since people buy assets to make financial gains rather than consume what they buy. <a href="http://www.nytimes.com/2011/09/04/business/economy/on-wall-st-a-keynesian-beauty-contest.html">Economist John Maynard Keynes compared</a> stock markets with a rather strange beauty contest whose objective was to pick (from a large group of faces) not the most beautiful one, but the one that others would pick as the most beautiful. </p>
<p>Keynes got it exactly right. On stock exchanges, success means doing what other people are doing, rather than buying the shares of companies that are really the best. Such herd optimism can last only so long, however. The stock market crash of October 1929 saw the Dow Jones Industrial Average fall 25 percent in two days, followed by further sharp declines. By May 1932, the market had lost 80 percent of its peak value. The Great Depression that followed <a href="https://www.amazon.com/Great-Crash-1929-Kenneth-Galbraith/dp/0547248164">showed that when bubbles burst</a>, the damage to the economy can be very long and very large. </p>
<p>Similarly, the 2008-2009 stock market plunge of more than 40 percent resulted in the Great Recession.</p>
<p>Finally, because people pay attention to readily available numbers and are attracted to wealth, rising stock prices become more important than producing a quality product efficiently. Owners of company stock care about recent performance and the quarterly results (sales and profits) of individual firms. They care less about the long-term investment plans of the business and whether quality is improving (something that leads to reputational gains and more profits in the future). As a result, company CEOs come to care more about the short-run performance of the firm and less about the long-term performance. </p>
<p>This is why we constantly get scandals such as <a href="https://theconversation.com/the-not-so-invisible-damage-from-vw-diesel-cheat-100-million-in-health-costs-48296">car companies installing exhaust systems</a> that are polluting but can beat inspection tests and <a href="https://theconversation.com/how-wells-fargo-encouraged-employees-to-commit-fraud-66615">financial firms</a> that sign customers up for accounts that <a href="https://www.nytimes.com/2016/10/12/business/dealbook/at-wells-fargo-complaints-about-fraudulent-accounts-since-2005.html">they did not ask for</a> and then charging them for this.</p>
<p>Quarterly financial results will look good and keep Wall Street happy. But unhappy customers will eventually abandon the business, leading to falling profits. </p>
<h2>Unraveling the ‘Trump bump’</h2>
<p>This brings us back to the so-called Trump bump. </p>
<p>Investors <a href="https://www.federalreserve.gov/econresdata/notes/feds-notes/2014/some-implications-of-knightian-uncertainty-for-finance-and-regulation-20140410.html">dislike uncertainty</a>. Upcoming elections add uncertainty, which ends with the election results no matter the outcome. This is one reason <a href="https://theconversation.com/will-the-trump-rally-continue-through-2017-70776">stocks tend to perform well</a> in the year after a presidential election.</p>
<p><a href="http://www.1stock1.com/1stock1_141.htm">Stock prices rose</a> 23 percent and 30 percent, respectively, in each of the years after Barack Obama won the election. They increased 7 percent and 31 percent following Bill Clinton’s victories in 1992 and 1996. </p>
<p>Economic factors are not irrelevant, though. Stocks did poorly the year after Ronald Reagan’s first election due to economic circumstances (ditto for George W. Bush) but rose 26 percent the year after “The Gipper” was reelected in 1984. </p>
<p>While we are likely to see a similar post-election rise in stock prices this year thanks to reduced uncertainty, there are other factors behind the recent rally. <a href="https://www.theatlantic.com/business/archive/2017/01/trump-corporate-tax-cut/514148">President Trump has promised</a> deregulation and corporate tax cuts, which will increase corporate profits and make their shares more valuable. </p>
<p>But his post-election honeymoon may not last long. One reason is that these policies could reduce middle-class incomes by limiting competition, reducing government spending and making another financial crisis more likely. And that’s bad news for companies, their stocks and the economy because consumers won’t be able to afford as many of their goods and services. </p>
<p>So just as the stock market feeds off optimism, when reality falls short of expectations, despair can create a downward spiral. The danger we face is that this “Trump bump” could be followed by a “Trump dump” if investors realize they’ve purchased a portfolio full of lemons.</p><img src="https://counter.theconversation.com/content/73570/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Pressman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
As the New York Stock Exchange marks 200 years since its official formation, investors are wondering whether the surging stock market is a ‘Trump bump’ or more like a lemon.
Steven Pressman, Professor of Economics, Colorado State University
Licensed as Creative Commons – attribution, no derivatives.