Insights & Reports > Kroll Global Fraud Report

As the current economic crisis continues to unfold, financial institutions must focus not just on the immediate situation but also on the likely long-term effects. If history is any guide, they will see a substantial increase in fraud claims, legal disputes, and regulatory actions. Over the coming months and years, new regulations will also likely be imposed on these companies, which will require even more time to result in any positive changes. Finally, of course, as fear continues to grip many throughout the globe, capital markets will remain volatile.

Following the “Black Monday” market correction in October 1987, securities regulators saw an exponential increase in the number of arbitration claims by investors seeking to recoup losses resulting from the market turmoil. Market downturns in 1991 and 2001 also sparked increases of this kind. Accordingly, the financial industry will likely see an even greater number of claims seeking to hold it accountable for market losses.

Those affected by the current economic downturn will seek to place blame wherever they can, particularly for the collapse of the subprime mortgage market. In some instances, individual players might legitimately bear blame. In other cases, where misconduct cannot be attributed to a specific party, claimants will still look for someone to bear responsibility for their losses.

Individuals, financial institutions, and others involved in the subprime debacle, on both the origination and securitization sides, may also be the subjects of concurrent regulatory and law enforcement activity. Corporate in-house and outside counsel may be busy for the next several years with a spike in investigations and legal claims. The FBI is currently contemplating how it will manage a flood of fraud and related allegations, and has acknowledged its need to increase the resources devoted to white-collar crime.¹ Other federal, state, and local agencies charged with regulating and investigating economic crimes soon will confront the same issues.

The past few years have seen a relative calm in litigation activity. Although the crisis has been unfolding for a while, there has been a time lag in new litigation while all parties consider the issues. It is difficult to predict precisely when the storm will break, but those who will likely be affected should begin preparing now.

Financial institutions, regulators, and law enforcement agencies should:

• Expect more client, customer, and other third-party claims; new legislation and regulation; as well as increased regulatory and law enforcement scrutiny
• Evaluate relevant existing policies, procedures, and internal controls to determine which require restructuring, revising, or elimination, and to uncover any areas which have not been previously addressed
• Take stock of the adequacy of existing human and other resources to deal with the expected surge of complaints, inquiries, and legal actions.

Finally, despite all that is coming to light, people will always be vulnerable to false hope schemes. Financial institutions must therefore fully embrace concepts such as enhanced due diligence, as well as intensify screening of prospective employees, business partners, and other third parties with whom they conduct business. They also need to commit to greater transparency in the day to day execution of business. Similarly, those charged with the oversight of financial institutions and other corporate entities must have greater institutional expertise to understand issues that arise, and adopt a more vigilant approach to regulation.

One thing is certain: financial institutions and those charged with their oversight will not continue to function as they have been doing and need to change in the face of these challenging times.

1. “FBI Struggles to Handle Wave of Financial Fraud Cases” http://www.nytimes.com/2008/10/19/washington/19fbi.html?_r=1 by Eric Lichtblau, David Johnston, and Ron Nixon (October 19, 2008).

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Nancy Goldstein is an associate managing director of Business Intelligence & Investigations for Latin America and the Caribbean. She specializes in securities & accounting fraud, FCPA and AML compliance. She spent 17 years as an enforcement attorney for the US Securities & Exchange Commission, NYSE and NASD.

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