The Con Men: A History of Financial Crime and the Lessons that you can Learn by Leo Gough
Publisher: FT Publishing International
ISBN- 13: 978-0273751342
In contrast to just a few years ago, actuaries, especially those who are executive or non-executive directors, receive an increasing volume of compliance information, and those involved in financial institutions have a significant amount relating to financial crime.
I was pleased to review a book on this subject, particularly one written in a light-hearted way as opposed to the mass of far less entertaining compliance information.
This book is based around a series of high-profile cases. However, more background is provided to give an insight into the reasons for the failures and what crucial evidence was available within the public domain before these failures came to light. The topics range from the South Sea Bubble to the still ongoing enquiry into alleged LIBOR rigging.
The aim is to provide the readers with sufficient data to understand the issues relating to past examples of fraud, and make us aware of the salient features and the telltale signs to look for. This will help to spot future fraud before it becomes serious and apparent within the public domain.
The conclusion of the book inevitably lays much of the blame at the door of the poor regulators, in all countries. It must be remembered they usually have meagre resources. However, they tread a fine line between encouraging and controlling entrepreneurship, so perhaps they should be more consistent in their regulation rather than swinging between a strict and rigid regime. The regulators should also listen to those in the market as this could set alarm bells ringing at a far earlier stage. It is a little unfair to blame the regulators alone, however, as it is primarily up to the investors to perform their own due diligence.
Company directors are not heavily mentioned in the book, although they do have corporate responsibility for dealing with fraud. As actuaries, we have the necessary skills to look for these warning signs, and with the increasing focus on the responsibility of directors, must ensure we have our say and do not look the other way, especially when there might be business reasons, and opportunities for increased profit by doing so. However, directors are passed considerable amounts of compliance data and they must be able to spot the important issues. This role is no longer an easy one.
The examples provided within the book are wide-ranging. Some fraudulent exercises are fully premeditated and their financial returns could not possibly come to fruition without it. Naïve - and sometimes sophisticated - investors often invest their funds too easily with very little due diligence or an appropriate examination for the evidence of fraud. These might include Ponzi schemes where the promised returns clearly cannot be realised, and the only way for their continuance is for new investors to provide the funding to produce the returns for past investors. Their only hope is that future investors continue to be naïve enough to do the same. And so the cycle continues. Once the house of cards inevitably falls down, those within the scheme lose out completely.
Other fraud includes false, innovative and creative accounting, including accounting for non-existent stocks and other assets. The book explains that as accountancy standards vary considerably around the world, it is this environment that often provides the framework for fraud.
Occasionally, fraud is caused by several market participants. They collude to create a false market position from which the originators benefit at the expense of honest players in that market. Although the investigations are as yet incomplete, the alleged LIBOR rigging may well be an example of this.
Some frauds are not premeditated but occur when an initially honest business plan fails, perhaps for reasons beyond management control, and then an increasing spiral of additional risky ventures is undertaken to try to produce the original expectations. This type of fraud creeps up on the perpetrators. Past successful and respected fund managers can become undone when they see an opportunity to enhance their returns and promote their reputations.
Too many investors seem to have all, or a large proportion, of their eggs in one basket. This is where basic investment principles become an important issue. Diversification, appropriate due diligence, market information from respected sources and other 'rules' are often forgotten when greed plays its part, and a very high return is just too tempting. On many occasions the signs of fraud are there but are ignored. If an opportunity looks too good to be true, then it probably is.
History is often a good teacher. Although the past cannot be guaranteed to be an accurate guide to the future on all occasions, it cannot be ignored. I would recommend this book, perhaps for an easy and interesting summer read.
Colin Czapiewski is an independent actuarial, insurance and risk management consultant