Insights & Reports > Kroll Global Fraud Report

While the world is still shocked by the Madoff affair – the high profile Ponzi scheme that continues to affect international banks, private funds, and high-net worth individuals across the globe – smaller scale pyramid schemes keep multiplying in many Latin American countries and elsewhere, affecting millions of individual investors. As lawyers in the United States are preparing to sue banks and feeder funds, victims are growing in number by the day.

Scams are equal opportunity affairs. They do not distinguish by nationality, race, social standing, wealth, education, profession, or background. Whether a high profile hedge fund in an office on New York’s Fifth Avenue or a dodgy operation run from a warehouse with two chairs in a South American shantytown, the impact is the same: victims have been fleeced by the thousand and the credibility of the global financial system has been compromised.

In Colombia, for example, David Murcia Guzman – known as DMG – was able to perpetuate his pyramid scheme for more than seven years. The government had to issue a special legal decree to intervene in his operation. Yet people across the nation still consider him some kind of Messiah or Robin Hood, demanding his acquittal and release from prison. Even The New York Times ran an article portraying him as a folk hero brought down by Colombia’s elite.

Murcia’s scheme shows how easy it is for someone with a little ingenuity to build a multi-million dollar scam that can bring down investors across the globe. DMG, as Murcia’s company was called, sold credit cards that guaranteed returns on prepaid amounts of between 50 and 300 percent in any given period, most of the time in less than six months. This attracted not only gullible consumers in the small towns of the coca-growing region of Colombia, but brand name manufacturers and service providers of all kinds and sizes – car manufacturers, electronics firms, telecommunication companies, plastic surgeons, beauty shops, and many others – also played along with the scheme to boost sales of their goods and services at special, discounted prices.

Although the authorities have not been able yet to ascertain the total loss that resulted from this criminal behavior, the media puts the figure close to US$2 billion American dollars in Colombia alone. Murcia’s cross-border scheme also attracted investors in Panama, Venezuela, Ecuador, the Dominican Republic, Mexico, Spain, Costa Rica, and other countries. His victims were largely common citizens enticed by the massive promised returns as they tried to save for their kids’ university tuition or earn some quick cash to buy gifts for Christmas. They also included, however, sophisticated institutional investors, such as retirement funds and local governments.

Whether it is Madoff or Murcia, the questions are the same. Why can’t banks pay me the dividends that these companies are offering? Who will pay me back what I invested? Where did the money go? Looking at the host of scams being uncovered, many have voiced criticism about the effectiveness of government regulators in detecting and preventing these schemes in the first place. There is concern that a criminal modus operandi used for decades is still the preferred method among unscrupulous people around the world, and that governments still have difficulty stopping it.

The challenge facing governments today is whether more regulation is the correct response to prevent this from happening again. After the corporate frauds of 2002, the US government replied with complex and robust compliance regulations – many called them excessive – thereby creating a burden on the business community. The Sarbanes-Oxley Act became the latest prominent entry in a long list of programs and certifications that have been created through the years to prevent frauds. Despite these regulations, fraudsters continue to prove they can penetrate and defraud companies in any industry, in any country around the world.

---

Andrés Otero is a managing director in the business intelligence and investigations division and head of the Miami office. Previously he ran the office in Bogotá, Colombia and is an expert in a variety of investigative and intelligence services, including fraud and corruption control, money laundering investigations, government relationships, conflict resolution, and other related matters.

---