Public enemies

Have you thought about a career in financial crime? Tom Toulson looks at whether it's a good time to go bad
Financial crime

A recession is supposed to be great for gangsters. While the rest of us wring our hands and count our pennies criminals go out and rob banks. Or at least they're supposed to. The Great Depression gave America John Dillenger, Baby Faced Nelson and Bonnie and Clyde. So far we've had Bernie Madoff. Fashions have changed. Gone are the Tommy guns and the get away cars. Today's crooks are more likely to clone your credit card or send you an email from Nigeria offering to put money in your account. But some things don't change. Recessions are still good news for criminals, right? Well, no, not really. In fact, it turns out, they never were.

It is true that during a downturn crime in general goes up and financial crime in particular. These difficult days are no exception. And so it's no surprise that last British Crime Survey showed a 5 per cent increase in people reporting themselves as victims of fraud. Some financial crimes are more popular than others. CIFAS - the UK's fraud prevention service - reported a huge 159 per cent increase in "account take over fraud" during January to September 2008 compared with the same period in 2007. That's people trying to steal your bank details. One way they do this is through so called "phishing websites"; links which invite you to enter your account details and often disguise themselves as legitimate sites, like your bank or ebay. They also reported that consumer awareness of these threats is lamentably low.

But it's not just consumers who should be worried. The Financial Services Authority warned businesses in its Financial Risks Outlook for 2009:

"Firms may be at greater risk of financial crime as economic stresses at the individual and corporate level increase the incentives for committing market abuse, fraud and other financial crimes."

In other words, beware of your employees. Times are hard. Everyone's under pressure. They may, at any minute, go mental and start gambling with your money. No one wants another Nick Leeson (or worse, a Jerome Kerviel) on their hands. And even if they don't actually start stealing or gambling they might start talking, which is nearly as bad. The FSA points out that when the markets are volatile it's a tempting time to start a rumour about that merger which may or may not happen but which will probably affect the share price. A clever (and criminal) employee can make a profit on these rumours. Taken together these gloomy figures and warnings suggest some sort of "white collar crime wave". But is this the result of the recession?

One factor that's clearly driving the crime rate up is new technology. To state the obvious, there would be no "phishing websites" without the internet. And criminals are getting ever more sophisticated in its uses. But this has always been true. New technology has always meant new crimes. First man invented the wheel, then the getaway car. It has nothing to do with the recession.

A simpler explanation is that people tend to turn to crime when they're feeling the pinch. This undoubtedly has some truth to it. It's easy to picture the poor businessman driven to dodgy dealing by desperate times. A little off-balance accounting here, a modest embezzlement there, pretty soon we're talking serious criminality. However, this simple picture ignores the more interesting truths.

For a start, crime doesn't get more popular when the economy crashes. It's at its most seductive during the good times. That's when people get greedy. Take Mr Madoff. "Bernie" claims to have started his ponzi scheme in 1991. It ended in December 2008. In other words, it coincided almost exactly with the economic boom. The fact that he got caught once the bubble had burst is no coincidence. He simply couldn't entice enough new victims to keep the scam going because people were being more careful with their money.

Someone who has started a fraud during a boom will be forced into ever more desperate deceptions during the bust so as to cover their tracks. Eventually this leaves them exposed. So a crook is most likely to get caught during a downturn. According to CIFAS, the fraud detection rate increased by 15 per cent during 2008 compared to the previous year. But this isn't a new phenomenon. It was equally true during the 'Great Depression' of the 1930s as the economist John Kenneth Galbraith wrote:

"Just as the boom accelerated the rate of growth [of fraud], so the crash enormously advanced the rate of discovery. Within a few days, something akin to universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behaviour was noticed. Most important the collapse in stock values made irredeemable the position of the employee who had embezzled to play the market."

Rising crime in any period can only mean two things. More people are doing it or more people are being caught. During a recession it's probably both. All of which means a career in crime at the moment is just as tough as everything else. You're better off going straight. Just ask Bernie.

Bernard Madoff

Born April 29th 1938 in Queens, New York to Jewish parents, his father was a plumber turned stockbroker. Madoff was apparently an average student. He married his high school sweetheart Ruth Alpern in 1959. The next year he set up Investment Securities LLC. At some point he turned his wealth asset management business into a giant Ponzi scheme. He promised impossibly high returns to investors. He then paid fictional dividends into their accounts, which came straight from the wallets of new victims, in effect robbing Peter to pay Paul. He also robbed his own family. When he pleaded guilty to eleven federal charges relating to fraud in March 2009 it was estimated he'd stolen $18 billion, much of which belonged to charities. In June he was sentenced to 150 years in prison. He owes his parents $22 million.

John Herbert Dillinger

Born in Indiana, Dillinger had problems with authority from a young age. He had run-ins with the law and was noted for having a "bewildering personality" and bullying other children. He enlisted in and then soon deserted from the US Navy. In 1924 he was sentenced to twenty years in prison for robbing a grocery store vowing "I will be the meanest bastard you ever saw when I get out of here". True to his word, when he was released on parole eight and a half years later he went on a crime spree across the mid-west. He knocked over 24 banks, two police stations and escaped from jail twice. The police shot him as he came out of the cinema, having been tipped off by a prostitute. He had been watching Manhattan Melodrama, a film about a racketeer, starring Clark Gable.

Nicholas Leeson

Born 25th February 1967, Leeson grew up in Watford. He left school and after a period as a bank clerk became a trader at Barings Bank. He had no formal training. In 1992 he was refused a broker's license because his application was fraudulent. Instead he was sent to Singapore to manage the bank's operations in the futures market. He began making unauthorised trades. At first he made a £10 million profit. Then he started to make big losses. He fled to Malaysia in January 1995 leaving a note which said "I'm sorry". His losses totaled £827 billion, twice Barings' available trading capital. Britain's oldest investment bank collapsed. Leeson spent six and a half years in prison in Singapore. He was diagnosed with cancer and was released in 1999. He survived his illness and is now the chief executive of Galway Football Club.

Jerome Kerviel

Born January 11th 1977, he grew up in Brittany and after completing a masters in finance, joined the Société Général in 2000. He was described by colleagues as "not a star". However, Christian Noyer, Governor of the Bank of France has since described him as a "computer genius". His former employers allege that around 2006 Kerviel began placing unauthorised trades and covering his tracks with fictitious hedges. By 2007 these totalled €49.9 billion, much more than the bank's total market capitalisation. In January 2008 the bank closed out his positions at a time when the market was dropping, resulting in losses of €4.9 billion. He was arrested and released on bail. Since leaving the bank he's been hired by Lemaire Consultants & Associates, an information systems and computer security consulting firm.

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