White collar crime has boomed as the financial story of this decade has been highlighted by Bernie Madoff, Enron and the subprime mortgage market debacle.
Fraud finds a home as the US fools itself
I vividly remember the day a year ago when Bernard Madoff was busted for masterminding the biggest Ponzi scheme in history because it coincided with the day the US Marshals Service broke down my neighbour's front door. She too, it seemed, had been the mastermind behind a fraudulent scheme, albeit on a slightly less grand scale.
Shola (I will not give her last name) was suspected of involvement in identity theft, having apparently used somebody else's name and credit history to obtain a mortgage. She may also have fleeced her mortgage bank for about US$500,000 (Dh1.83 million) and two tenants out of a year's rent. But Shola was no longer at home. She had moved on, and besides, the marshals were not there to arrest her for fraud. They were there to clear the building and reattach the front door with a giant padlock and chain on behalf of Deutsche Bank National Trust, the new owners.
Back at my desk, the marshals having successfully secured the house next door, I noticed my inbox was heaving with e-mails from the offices of the US Attorney for the Southern District of New York, the local justice department outpost that deals with a great deal of white collar crime because Wall Street falls within its bailiwick. Ponzi schemes, mortgage fraud rings, investment swindles, even a hedge fund manager faking his own death to avoid charges of embezzlement were included in the latest missives from the Feds. It seemed to be raining fraudsters in New York all of a sudden.
I have lived in New York City since 2001, spending the majority of my time writing about business, finance and economics. As I reflect on the marshals driving away from Shola's place and Mr Madoff being led from his $7m Manhattan penthouse in handcuffs, it seems that virtually every aspect of my life in America had been overshadowed by fraud of one sort or another for the best part of a decade. I arrived in the US just after the Enron saga blew up. Back then, the collapse of the seventh-largest US company constituted the "biggest bankruptcy in the history of the world", a title it has lost several times over in the intervening years.
Enron was not alone. Its collapse detonated like the first in a long line of small explosives used to bring down a derelict apartment block. The second explosion was Arthur Andersen, the former accounting firm that helped Enron cook its books. Next to go up in smoke was WorldCom, a telecommunications group that also used Arthur Andersen as its auditor. Elliot Spitzer was the attorney general of New York state when this rash of frauds sprang up. He seized the moment in 2003 and began filing charges and making allegations against the biggest investment banks on Wall Street. In doing so he called time on another long-standing American way of fraud: using investment analysis to ramp up the share prices of companies the bank had an interest in.
The allegations he made were so potentially damaging to Wall Street, not least Citigroup, which was at the centre of the Enron scandal and many others, that the banks agreed to stump up $1.4bn in fines and settlement payments to make the whole thing go away. If you are wondering what happened to the crime-fighting Mr Spitzer, he made it all the way to the governor's mansion in New York only to be unceremoniously dethroned last year when it was revealed he spent some of his free time as a customer of an interstate prostitution ring.
While Wall Street was fighting Mr Spitzer with one hand and fending off allegations of complicity with the likes of Enron, WorldCom, and Arthur Andersen with the other, the investment banks were making untold billions selling asset-backed securities based on residential mortgages. The market for home loans exploded at the turn of the century as the housing market powered to new heights every week.
Some claim that the subprime mortgage market that fuelled this massive bubble was, and indeed still is, the biggest fraud ever perpetrated in America. Forget Mr Madoff's $65bn Ponzi scheme. The subprime mortgage market and the secondary securities market, they say, spawned a giant confidence trick involving tens of thousands of American households and hundreds of billions of dollars of dodgy debt.
Of course the billions of dollars in loans taken out by people who could not pay them back were repackaged by Wall Street, chopped up and salted with remnants of better quality loans, the idea being that their inherent value would somehow rub off. This in itself was yet another form of illusion. To do it effectively, and in an effort to not seem so brazenly fraudulent, the banks had to get the ratings agencies to play ball. They did just that, applying high-quality credit ratings to instruments that were in fact worse than junk. Yet another fraud perhaps?
Such lax standards left the door wide open for crooks who have become so ensconced in the housing market that not even its collapse has stopped them. 'Foreclosure fraud', involving criminals offering bogus 'rescue' deals for mortgage borrowers who are about to lose their homes, is the latest trend. The deputy director of the Federal Bureau of Investigation (FBI), John Pistole, has conceded that financial crime has escalated to such a degree in America in recent years that it has become an "expansive crime problem currently taxing law enforcement authorities".
The number of fraud investigations underway by the FBI is increasing at a rapid clip. The number of FBI mortgage fraud investigations has risen from 881 in 2006 to more than 2,000 this year, according to testimony given by Mr Pistole in Congress in March. The agency has more than 560 open corporate fraud investigations, including 43 corporate fraud and financial institution cases directly related to the current financial crisis.
The Commodity Futures Trading Commission (CFTC), meanwhile, is investigating cases of fraud at an unprecedented rate. So many, in fact, that the CFTC commissioner Bart Chilton calls the phenomenon, rather flamboyantly, "rampant Ponzimonium". Barry Minkow knows all about doing jail time for fraud in America. In the late 1980s he was the Bernie Madoff of his day and went to prison for running an enterprise that conned millions from countless victims.
"America is the breeding ground for every fraudulent scheme we know of today," he says. "Name any grand-scale fraud and you can bet it originated here. And it is hurting us: because of this reputation we have gotten, the US has become the laughing-stock of the world." The main problem, Mr Minkow believes, is that authorities in the US are not interested in prosecuting small-time fraud. "But, like me and like Bernie Madoff, we all start out small," he says. "Nobody plans to become the biggest fraud in history. We all have what we call 'the cure' - a plan to get out and go legit."
If US authorities were equipped and interested enough in stamping out small-time fraud, the chances are we would never see the type of systemic schemes such as Mr Madoff's or the subprime mortgage scandal. "The biggest problem in this country though, as far as fraud is concerned, is a problem every fraud faces," says Mr Minkow, who these days is both an evangelical minister and an anti-fraud adviser. "We con ourselves. That is the greatest con of all. We convince ourselves that what we are doing is OK and that we can get out before we hurt anyone.
"The truth is, it isn't OK from the start. And deep down we know it isn't."
James Doran joins The National in the New Year as deputy business editor