Financial Fraud Is Back - Stronger Than Madoff - Forbes Financial Fraud Is Back - Stronger Than Madoff - Forbes

Thursday, June 7, 2012

Financial Fraud Is Back - Stronger Than Madoff - Forbes

Financial Fraud Is Back - Stronger Than Madoff - Forbes

Financial fraud is on the rise. You’d think with the increased awareness due to publicity around Bernie Madoff’s $65 billion dollar Ponzi scheme that incidents of financial fraud would have gone down, but instead it has been quite the opposite.  According to the Federal Trade Commission’s (FTC) Consumer Sentinel Network Data Book, there has been a 62% increase in financial and other fraud claims in just three years, with over 1.5 million individual claims in 2011.  Some of it we have little control over, such as hackers accessing personal account information from financial institutions over the internet.  Areas we can control are the more personal ones where we are actually writing checks, although “affinity” scams and Ponzi schemes are more subtle and not as easily recognized.  With the passing of the JOBS Act of 2012, “crowd funding” opportunities also open the door for more fraud possibilities.

I am highly aware of financial fraud, not just because I am a financial planner, but because I live in a state participating in a wide scale anti-fraud awareness and education campaign. I live in Utah, a state besieged by financial fraud (approximately $2 billion dollars since 2010), especially “affinity fraud,” which targets closely knit religious groups. Utah only has a population of about 3 million people, so the fraud bill is around $700 per person.  At this level of fraud, the state of Utah loses about 1% of its Gross State Product each year—dollars that are sorely needed in today’s economy.

The victim’s lives are changed forever, but fraud also affects everyone.  A fraud victim may have to delay retirement if their nest egg disappears.  This means not one but two jobs are affected—the co-worker who might have gotten a promotion, and the young new hire who would have taken their place.  The effects of financial fraud can contribute to high unemployment as workers hang on to their jobs since they can’t retire.  It also may contribute to the $1 trillion in student debt as children of fraud victims take on additional student loans when college funds are wiped out. The housing market is affected when a home is foreclosed on and the bank takes a loss, which can cause neighborhood real estate values to decline.  Even the community takes a loss when less property tax is paid, which means fewer funds available for public schools.  There is also the unseen cost when fewer cars are purchased, fewer new homes are built, and fewer remodeling projects take place.  Whether it is direct or indirect, fraud’s effects are deep.

Here are three areas where financial fraud can occur, and how to protect against it:

Insure yourself against identity theft.  Identity theft may be a passive type of fraud where you aren’t actually writing a check to a scam artist, but you are vulnerable nonetheless.  Security can’t keep up with the proliferation of identity theft as hackers are constantly finding new ways to access your personal information.  In fact, McAfee Blogger Carlos Castillo writes about Trojan computer viruses ironically called “bankers” that steal your bank passwords.  Smart phone information is the next challenge for hackers.

Internet banking and mobile banking apps aren’t bad.  In fact, easy access to your information can be helpful in managing your cash flow.  You just don’t want anyone else getting your information.  With malicious hackers out there, it’s tough to protect yourself.  The best course of action is to use some basic common sense practices of protecting your personal information, and to only use secure sites.  Beyond those protective steps, you can insure against loss in two additional ways.  Start by choosing financial institutions that back you up with strong guarantees.  For example, Bank of America offers a zero liability guarantee for their consumer debit and credit cards.  Check with your bank to find out what your liability would be for fraudulent transactions.  Ask them if there is a time frame in which you need to report fraudulent transactions, and be sure to monitor your accounts accordingly.  For example, US Bank will cover any unauthorized transactions as long as you report them within 60 days of the first statement date when the unauthorized transactions appeared.

Secondly, subscribe to a credit monitoring service through one of the major credit bureaus.  As a former victim of identity theft, I try to be extra cautious and use Experian’s service that has daily monitoring, alerts, and a $50,000 guarantee with access to a fraud resolution specialist.  The new reality in the world today is in addition to life, disability, home and auto insurance, we may also need anti-fraud insurance.

If you are a victim of identity theft take action immediately. Report it to the police and place a fraud alert on your accounts with the credit bureaus.  With this action, a requirement to notify you if new credit is being requested in your name is added to your credit file (at no cost to you).  Close your bank accounts and transfer funds to new ones.  The sooner you take action, the better you can protect yourself.  The Federal Trade Commission has guidelines on actions to take – click here.

Watch out for the same scam but with a different disguise.  In almost all cases of fraud, there is no actual investment made.  The classic Ponzi scheme consists of paying off early investors with money taken in from late investors—a scam that dates as far back as 1899.  There may be other types of scams out there that have yet to be detected.  Ironically, this is actually one of the easiest things to catch.  The problem is usually the scammers seem beyond reproach.  Maybe they are part of a church or synagogue, or they are a well respected leader in the community, so the victims don’t do thorough due diligence on the investment.

The bottom line is with any investment, there should always be an independent statement coming from a third party.  If you are only getting an investment statement from the broker, and not the investment company, that should raise a red flag.  You should always receive a separate statement from the investment company where the funds are held with a general phone number to the home office.  Some other red flags include consistently high investment returns, unregistered securities, unlicensed sellers, and overly complex transactions.

Prevention is the best defense for this type of financial fraud since recovery of assets could be minimal at best.

Watch out – “Crowd funding” could attract the next wave of financial scammersCrowd funding has been around in the U.S. for years as a way for charities to raise capital, and President Obama was a master at generating campaign contributions through a similar system using Twitter and Facebook during his presidential election campaign in 2008.  Used correctly, crowd funding can be a boon for startups that are looking to raise money, which in turn will hopefully help create jobs in the U.S. “Used correctly” is the operative term because the system is fraught with potential fraud against unsuspecting investors.  For this reason, the recently signed JOBS Act has incorporated investment restrictions that are intended to protect investors, such as capping investments at $2,000 for investors with an income or net worth of less than $100,000.

World stocks rise on hopes for EU, US stimulus - Lompoc Record

World stock markets rose Thursday, boosted by hopes that Europe is preparing to take action to tackle the region's financial crisis and that the Federal Reserve will consider additional support for the U.S. economy.

Traders will be closely watching Fed Chairman Ben Bernanke's testimony before a congressional committee Thursday for any hints that the U.S. central bank is considering more monetary stimulus.

Such hopes helped push up European stocks in early trading. Britain's FTSE 100 rose 0.4 percent to 5,404.65. Germany's DAX added 0.5 percent to 6,125.05 and France's CAC-40 rose 0.6 percent to 3,075.05.

Wall Street was set to open a little higher. Dow Jones industrial futures rose 0.1 percent to 12,431 and S&P 500 futures added 0.2 percent to 1,317.80.

Hopes for strong action by the U.S. central bank were lifted by comments from Atlanta Federal Reserve President Dennis Lockhart, who said Wednesday that sustained weakness in job creation could justify more action to support the economic recovery.

The Fed is believed to be considering a third round of "quantitative easing," or purchases of Treasury bonds to try to lower long-term interest rates and encourage borrowing. Traders have speculated that a third round, QE3, is under consideration.

The Fed could also continue its "Operation Twist" program, under which it sells shorter-term securities and buys longer-term bonds to keep their rates down. The current Operation Twist is set to expire at the end of this month.

"Investors will try to get a hint from him whether Bernanke is going to roll out QE3 or just extend Operation Twist or some other kind of hybrid policy," said Jackson Wong, vice president at Tanrich Securities in Hong Kong. "But there will be something. If he hints at nothing, the markets might take it negatively."

Benchmarks across Asia rose. Japan's Nikkei 225 index added 1.2 percent to close at 8,639.72. Hong Kong's Hang Seng gained 0.9 percent to 18,678.29. South Korea's Kospi index jumped 2.6 percent to 1,847.95.

Australia's S&P/ASX 200 climbed 1.3 percent to 4,108.60. Benchmarks in New Zealand, Taiwan and Indonesia also rose, but those in mainland China and Singapore fell.

Speculation about new Fed moves helped traders overlook the disappointment that the European Central Bank offered no new monetary stimulus on Wednesday. Its chief Mario Draghi said it was the turn of governments to restore confidence in the 17 nations that use the euro common currency.

Draghi, however, has left himself some room to maneuver, saying that "we'll monitor closely all the developments and we'll stand ready to act" if necessary. He also said some members of the 23-member ECB council advocated a rate cut.

"This implies that rates cuts are in the pipeline very soon but any more action will require European politicians to act first," analysts at Credit Agricole CIB in Hong Kong said in a market commentary.

Japan's export shares rose as the yen softened against the dollar, which helps to make the cost of Japanese products more competitive in global markets. Mazda Motor Corp. jumped 4.1 percent. Panasonic Corp. added 4.2 percent.

South Korean blue chips posted hefty gains, including Samsung Electronics, up 5.2 percent. LG Electronics Inc. jumped 3.4 percent and Hyundai Heavy Industries climbed 3.8 percent.

Benchmark oil for July delivery was down 31 cents to $84.71 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 73 cents to settle at $85.02 in New York on Wednesday.

In currencies, the euro rose to $1.2557 from $1.2546 late Wednesday in New York. The dollar rose to 79.37 yen from 79.18 yen.

Financial mania: why bankers and politicians failed to heed the warning signs of the 2008 credit crisis -


Published by University of Leicester Press Office for University of Leicester in Education and also in Central Government

Western economies displayed the same kind of manic behaviour as psychologically disturbed individuals in the run up to the 2008 credit crisis -- and it could happen again, according to a new study.

Bankers, economists and politicians shared a “manic culture” of denial, omnipotence and triumphalism as they threw caution to the wind, says Professor Mark Stein, the award-winning academic from the University of Leicester School of Management.

Observing - but not heeding - the warning signs from the collapse of the Japanese economy in 1991 and the 1998 crisis in south-east Asia, the financial world in the West went into an over-drive of denial, escalating its risky and dangerous lending and insurance practices in a manic response, he says.

Professor Stein, who has today (June 7) been awarded the iLab prize for innovative scholarship, identifies and describes this manic behaviour in the 20-year run up to the credit crisis in a paper published in the Sage journal Organization.

The causes of the banking collapse that plunged the UK and many other countries into recession have been well documented but an important question remains:  Why did economists, financiers and politicians fail to anticipate it?

Professor Stein argues that the financial world was suffering from collective mania in the two decades running up to the events. “Unless the manic nature of the response in the run up to 2008 is recognised, the same economic disaster could happen again,” he warns.

He defines the manic culture in terms of the four characteristics of denial, omnipotence, triumphalism and over-activity.  “A series of major ruptures in capitalist economies were observed and noted by those in positions of economic and political leadership in Western societies.  These ruptures caused considerable anxiety among these leaders, but rather than heeding the lessons, they responded by manic, omnipotent and triumphant attempts to prove the superiority of their economies.”

The massive increase in credit derivative deals, industrializing credit default swaps and the removal of regulatory safety checks, such as the repeal in the United States of the landmark Glass-Steagall banking controls were a manic response to the financial crises within capitalism,” he says.

Professor Stein’s award-winning research paper - A culture of mania: a psychoanalytic view of the incubation of the 2008 credit crisis – says this behaviour was also strengthened by “triumphant” feelings in the West over the collapse of communism.

“Witnessing the collapse of communism, those in power in the West developed the deluded idea that capitalist economies would do best if they eschew any resemblance to those communist economies, thereby justifying unfettered financial liberalization and the destruction of the regulatory apparatuses of capitalism. The consequences of this manic response have been catastrophic, with the on-going eurozone crisis being - in many ways - a result of this,” he says.

“Whether one examines the actions of banks and hedge funds, or the limitations of ratings agencies, auditors, regulators and governments, a more worrying and deeper question emerges concerning why so many parties, more or less simultaneously, were implicated in such unprecedented and extreme risk-taking.”

CANADA STOCKS-TSX slips as Fed comments weigh on gold - Reuters UK

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