How Common is Financial Fraud?

Obviously, the Democrats seem to be a lot better at detecting it than the Republicans, but they do have favorable timing on their side.  Bernie Madoff made a lot of people take a real close look at all of their investments, and not all liked what they saw.

Frauds like Ponzi schemes aren’t common, but they aren’t rare either.  CNBC is in no danger that they will run out of material for their American Greed series, and a similar International Greed series would not lack for mateial either.

I would bet that there are several hundred frauds going on right this minute.  Several hundred isn’t a big number in a world this size, but several hundred fraudsters still can hurt tens of thousands of victims.

The odds are pretty good that you both know someone who lost money to Bernie Madoff or Allan Stanford, and that you also know someone who is being defrauded right this minute.  I read not too long ago that more than one hundred Ponzi schemes have turned up since Madoff was outed.

There are a lot of crooks out there, and the system is not set up well to catch them.  This is partly because catching crooks is not the priority of the regulations.  The priority of all regulations is to protect the industry being regulated. That is not the original intent or the nominal rationale of any regulation, but industry lobbyists set the agenda for politicians because industry pays for their politcal campaigns.

Where are these crooks?  They are where the money is.  It is as simple today as it was to John Dillinger who robbed banks because “that’s where they keep the money.”  But smart crooks have noticed that you can’t make a billion dollars robbing banks with a gun.  You need nice looking paperwork, but everybody has a computer these days.  Anybody with a little skill and patience with a computer can generate enough paperwork to look like a real business.

So how do you tell a real business from fraudulent business?  To some extent you can’t, but businesses that don’t make anything tangible should be given the highest level of scrutiny.  Businesses that claim to make money by moving some kind of paper should be looked at very carefully.  Lots of businesses do make their money this way, but make sure you understand exactly what is going on before you give them your money.  It you think what the people are doing is over your head, it’s out of your budget.

Of course, fraud isn’t limited to outright scams.  Tyco and Enron were real businesses that had fraud inside them.  Probably every large business has had to deal with some level of fraudThere are lots of real businesses with some level of fraud.  We already know that lots of embezzlers are caught and prosecuted while many more are caught and quietly asked to leave.  Legitimate businesses can turn into frauds when they are looted from within.

And even if you duck all manner of fraud, you can always lose when you hand your money to other people.  Lots of legitimate businesss efforts fail, and almost all fail eventually.  Invest in honest businesses that you have checked out thoroughly, and don’t lose more than ten percent of your stake in any one venture.

Capitalism IS Gambling, and fraud is only one of the risks.  A good gambler takes steps to protect himself against cheaters.  Be a player, not a mark.


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