Global Economy and it’s Impact on Current Fraud Trends

Jeffrey R. Filliter, Managing Director – Froese Forensic Partners Ltd.

Frauds in general continue to be on the rise at an alarming rate in direct correlation with both the domestic and global downturn in the economy. Those who might otherwise be predisposed to committing crime find themselves reaching states of desperation as a result of their inability to provide, in some cases, even the necessities of life. In addition, organized crime groups capitalize on desperation by preying on those who are most vulnerable financially to join their forces in defrauding the wealthy. The recent “Occupations” that occurred throughout the world’s economic powers were a clear sign of many people’s frustration with the perceived divide between the wealthy and the impoverished. There is evidence to support that organized crime factions infiltrated those groups with a view to heightening the demonstrations and to recruiting potential fraudsters to assist in their attack against “the 1%”, which to many represents the growing wealth gap between America’s wealthy elite compared to the overall citizenry.

Difficult economic times by nature give rise to increased fraudulent activity, while positive economic times open the flood gates for opportunity. What changes are the approaches and methods used by the fraudsters, and the potential victims they target. In poorer economic times crimes such as identify theft, tax fraud, frauds against seniors, and mortgage fraud are prevalent. In more lucrative times investment frauds and ponzi schemes rise to the top of the criminal ladder.

Organized crime continues to play a lead role in financially based crime, particularly evident in North America. Tamil Tigers and Nigerian based groups focus on investor fraud through “boiler room” operations, and Italian mafia groups continue to launder funds through legitimate stock trading, resulting in a corruption of the North American markets. Even the non-financial based criminal activity controlled by organized crime, such as prostitution and narcotics trafficking, results in funds being laundered through otherwise legitimate entities, further corrupting the world’s economic systems.

The impact of fraud on a global scale is apparent, from increased tax burdens facing both the private and public sectors, to increased insurance premiums, to a decrease in economic growth and consumer spending, fraud impacts everyone. Internal fraud is clearly on the rise during times of economic strife, resulting in price increases across the board, budget reductions, and in more extreme cases, layoffs to offset the loss of income. The “Catch-22” in all of this is that oftentimes these layoffs result in increased exposure to corporate fraud resulting from the reduction in safeguards and internal controls provided by employees who were laid off – fewer eyes watching the corporate coffers. As internal security measures and controls decrease, opportunity rises. As indicated, the state of the economy in large part dictates the types of frauds that are perpetrated, identifies target groups for organized crime factions, provides unique opportunities for fraudsters, and reduces internal control measures aimed at preventing fraud. Corporations and individuals both need to be particularly diligent during poorer economic times, and weary of the increased potential for attacks of fraud. Professional reviews of operational policies and procedures aimed at identifying vulnerabilities and exposure to risks, and increasing security measures in areas where they appear to be most vulnerable, can be particularly useful during these times. Consideration should also be given to rotating these reviews on a relatively frequent basis through the areas where the highest risk appears, so as to decrease the element of opportunity as much as possible.