Financial fraud has always been a mainstay of society and economics. The first case of documented financial fraud dates back to 300 B.C. when a Greek merchant took out a large insurance policy on a cargo shipment of corn. The shifty merchant hatched a plan to keep his cargo of corn, sink his empty ship and receive the insurance money. Unfortunately for the merchant, the plan failed, and he drowned trying to escape his crew when they caught him in the act.
Financial fraud has continued to evolve with the economy and technology. The most notorious cases of corporate fraud in the previous generation were cases such as Worldcom, Enron and Bernie Madoff. Today, we have seen corporate fraud continue to evolve into cases such as WeWork, Theranos and most recently accusations of wide-spread fraud at cryptocurrency exchange FTX, which the Department of Justice referred to as the “fastest big corporate failure in American history.” While financial fraud is of course not new, what is alarming is that is getting much more costly.
According to the Federal Trade Commission, American consumers reported losing more than $5.8 billion to fraud in 2021, an increase of more than 70% from the prior year. Those figures don’t include reports of identity theft and other categories, so the actual number is undoubtedly higher. Part of the reason for this rapid increase in fraud is a result of not only fear and confusion because of the pandemic, but also imposter scams, which were the most prevalent form of fraud. Typically, scams in these categories cost victims $1,000 to $3,000.
An additional driver of financial fraud more recently has been how Digital Assets (Trends 2022) and technology has made it easy to move money quickly. Attackers are looking for the weakest link in the chain, and often a bank’s authentication controls are not worth the effort, so they attack the password or the persons themselves. In the case of cryptocurrency, one of the strongest cases advocates make for its utility value are its decentralized structure and transparency created by the blockchain (DeTrust Trend 2022), however, to date those attributes have not protected investors from significant levels of fraud. The trends in financial fraud are likely to continue, given the lack of regulatory oversight in opaque areas such as cryptocurrency, global interconnectedness, and the amount of personal information widely available on the internet that attackers can prey on.
The fraud cycle typically lags the financial cycle. As we are seeing the end of an era of zero interest rates and cheap money, more frauds are likely to be exposed. The timeless Warren Buffett quote still rings true, “A rising tide floats all boats… only when the tide goes out do you discover who’s been swimming naked.”