The Digitisation of Fraud

The Hutch Report

Whether we speak about the new economy; the old economy or any economy, fraud is still fraud. It is the wrongful or criminal deception intended to result in financial or personal gain. Yet even though there has been a large amount of publicity surrounding some very high profile cases of fraud nothing seems to change. Auditors and accounting professionals seem to remain impotent when it comes to fraud detection.

The truth is, the audit of traditional financial statements were never designed to detect fraud. The audit is simply a process of checking a company’s math and application of accounting rules. This is probably why it has been so prevalent in large corporations in spite of the fact that they have an army of accountants from the largest auditing firms scouring their books yet no cases of deception to show for it.

According to the findings in the “Report to the Nations on Occupational Fraud and Abuse” study released by the Association of Certified Fraud Examiners in 2014, the higher-ranking the fraudster was, the greater the losses. In addition, financial fraud is more difficult to uncover because the perpetrators have less of an emotional connection to what they are doing than they do for other types of crime. The fact that they are not actually touching money as opposed to fudging documents, they feel less guilty of committing a crime.

There seems to be less leniency towards drug dealers and petty criminals as opposed to, say bankers, but the truth is financial fraud has destroyed just as many or more lives through the theft of millions taken from shareholders and pensions plans.

The report estimated that the typical organisation loses five percent of its revenues each year to fraud. That would work out to a global impact of $3.7 trillion, however, it is also believed that there are so many more cases that are not discovered.

So now we find ourselves living in a digital world with the increasing development of the Internet and our dependence on it. We have seen the introduction of the blockchain with which has come the proliferation of a number of crypto-currencies chief among those being Bitcoin.

With the advent of a new technology that has the capacity to disrupt our financial system, it is not surprising that with it comes a new breed of criminals. Cybercrime is already costing the U.S. economy as much as $120 billion a year and as much as $1 trillion globally, according to a study released in 2013 by McAfee and the Centre for Strategic and International Studies. Seeing that it is so difficult to regulate Bitcoin, it has been the tool of choice for these cybercriminals.

It is not surprising to see so many come out and chastise this new technology, especially those with a weak understanding of its merits. Equally not surprising is the large number of financial industry participants at the forfront of these critisisms. Ironically it is those same participants who have already been responsible for billions of dollars of fraud in our financial system.

The truth is, it doesn’t matter what the weapon is. If you kill somebody using a gun, knife, poison or your own hand, the end result is that they are still dead. If you steal money from someones purse, removed the funds from their bank accounts, knowingly overcharged them for services never rendered or expropriated funds via Bitcoin, the result is the same.

Liberty Reserve was founded in Costa Rica by Arthur Budovsky. Through his website it was possible for anyone to transfer money with very little regulation. The only required details were name, e-mail address, and birthday. Liberty Reserve never actually handled the funds, as it converted the fiat deposits into Liberty Reserve Dollars or Liberty Reserve Euros, whose values were pegged to the value of the US dollar and euro respectively. This made it ideal for funneling criminal funds. The authorities eventually closed in on Budovsky’soperation and shut it down. In January 2016, Budovsky pleaded guilty to money laundering and admitted that he had secretly moved at least $122 million.

When it comes to Bitcoin, the case that is cited the most is that of the Silk Road bust. In the Silk Road case the federal government had seized more than $33 million worth of bitcoin from the computers of the site’s alleged founder, Ross William Ulbricht. It is believed that the operation generated roughly $1.2 billion in sales over three years. Tracing that money and recouperating it would be deemed as next to impossible.

We can compare these two “digital” cases with that of Enron. Enron Corp. was essentially an energy trading company that reached dramatic heights, only to face a dramatic collapse. The story ended with the bankruptcy of one of America’s largest corporations. Enron’s collapse affected the lives of thousands of employees and shook Wall Street to its core. At Enron’s peak, its shares were worth $90.75, but after the company declared bankruptcy on December 2, 2001, they plummeted to $0.67 by January 2002. Enron shareholders filed a $40 billion lawsuit although only ended up receiving limited returns from the lawsuits, despite losing billions in pensions and stock prices. This was the largest bankruptcy in US history until Worldcom a few years later.

The means and methods were different in these cases but the results were the same. Fraud is fraud.