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white-collar fraud will likely rise during financial crisis
January 23rd, 2009 by Kurt Niland
Widespread economic turbulence and the threat of a global recession have created an atmosphere prime for fraud and white-collar crime, according to a report released by risk consulting company Kroll, an operating unit of Marsh & McLennan Companies, Inc.
Blake Coppotelli,the senior managing director in Kroll’s Business Intelligence and Investigations practice, says that “in difficult economic conditions, businesses are struggling to compete for fewer business opportunities.”
“This creates more incentives to deviate from proper business practices and engage in fraudulent activities to protect and maintain revenue. We saw a marked increase in the number of corporate fraud cases during the market downturns of 1987, 1991, and 2001,” Coppotelli said in a statement on Kroll’s website.
An increase in fraud investigations, legal disputes, and regulatory action will likely accompany the rising tide of corporate crime in 2009 — trends that could be bucked by whistleblowers as the market recedes.
“Flotsam and jetsam floats to the surface in a financial storm,” the Kroll report states. The proverbial statement rings true as the questionable practices of several banks, investment companies, and other financial institutions are revealed. So far, the $50-billion Ponzi scheme spearheaded by Bernie Madoff has been the largest and most damaging case of financial fraud, yet other smaller schemes continue to be exposed.
Fraudulent activity in the financial sector will pick up as individuals and institutions alike will try to keep their cash flows flowing. Others, as the Wall Street Journal points out, will be out there simply trying to “make a quick buck.” White-collar fraud that began in the bull market will assume other forms and increase in the bear market.
Kroll cautions that there may be a rise in a devious style of short-selling in which “loosely organized cartels” formed by brokers and traders spread malicious rumors about companies in an effort to forge false gains and losses in company stock. Short selling is a legitimate form of trading, yet it enters unlawful territory once fraudulent traders start manipulating the market with lies and rumors. Checking sources and facts becomes confusing, if not impossible, because word is typically spread by cell phone text messaging and computer instant messaging, forms of information sharing that aren’t easily traced.
Fraudulent schemes will not be limited to the U.S., either. According to Richard Abbey of Kroll, “companies should not think that they are safer in certain country markets – this is a global concern that spans all industries,” he said.
