Fraud and the Economy

by Dan Maland | December 2018
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In times of economic growth, such as what the United States has experienced during the past five years, it is easy to forget that fraudsters are still in our midst.

Make no mistake, fraud is still on the rise during these growth periods.  Just because it is out of sight and out of mind does not mean it does not exist.  Pricewaterhouse Cooper’s 2018 Global Economic Crime and Fraud Survey showed that 49% of its respondents were victims of fraud or economic crime this past year, up from 36% in 2016.  https://www.pwc.com/gx/en/forensics/global-economic-crime-and-fraud-survey-2018.pdf

This uptick can be explained through several economic factors.  First, during times of economic growth, individuals and entities have more cash on hand and are generally more open to alternative ideas for investing that liquid capital.  Second, technological advances have made international communication and cross-border and domestic money transferring easier, more affordable, and more efficient than at any other point in history.  This general willingness to spend, and the ease in which individuals can do so, creates a perfect environment for a fraudster.

However, in times of economic uncertainty or recession, individuals tend to tighten their grips on their wallets which in turn can chill or kill a fraudulent scheme.  Frauds – and Ponzi schemes especially – survive so long as there are sufficient incoming funds to pay off and assure prior investors.  Once the flow of funds into the fraud begins to dry up it becomes very difficult to keep a fraud that is not anchored in real investments afloat.  As a result, when the bottom falls out of the economy, fraudsters are among the first groups to fall with it.

As we recall, the Great Recession kicked off when Lehman Brothers’ stock lost roughly half its value, dragging the S&P 500 down with it, on September 9, 2008.  It took less than five months from that day for one of the most successful modern fraudsters – Bernie Madoff – to find himself trapped in a position where he had to reveal his massive fraud to his two sons, who then reported him to the authorities.