Insights & Reports > Kroll Global Fraud Report

They say everything old is new again. In the wake of the Madoff scandal, Ponzi and other fraudulent financial schemes are the lead stories in the media and at the water cooler. In fact, these scams are nothing new, and the Madoff case is a modern cautionary tale about an age-old con.

Investors, politicians, and the general public are asking why, with all the red flag warnings over Madoff’s operation, those charged with its oversight failed to act for so many years. The public is imploring the government to restructure its regulatory agencies, increase regulation of financial services, and more aggressively pursue and punish such thieves.

So what will be the likely result? A perfect storm for increased regulation is blowing, powered by the Madoff, Satyam, and countless other financial scandals; a global economic crisis; political change; and the Congressional call for action by the Securities and Exchange Commission (SEC) and other regulators. There is much discussion about the possible future structure of various regulatory agencies, their respective authority to investigate and enforce, the substantive provisions of revised or new laws, and the scope of application. Nothing permanent has been implemented yet, but those likely to be impacted should try to anticipate any changes by assessing whether they have policies and procedures, personnel, structure, and other elements in their business models to adapt to revisions in the regulatory framework. What might any new regulatory scheme contain? If there is a bright side to the Madoff catastrophe, it is that the scandal has provided the impetus to impose transparency requirements on more of the financial sector. There are, for example, renewed efforts to increase regulation of hedge funds, including that they implement anti-money laundering compliance programs. While many funds – particularly those associated with registered entities – already adhere to AML “best practices,” new regulation would further reduce the exposure to risk.

The SEC has also made great strides in shoring up public confidence in capital markets. It has, among numerous other moves: implemented emergency actions to ban short selling in financial securities; entered into a Memorandum of Understanding with the Federal Reserve to ensure information sharing and coordination of regulatory efforts among regulators; approved exemptions to allow a central counterparty for credit default swaps; requested financial institutions to provide further disclosures regarding off-balance sheet arrangements; and issued clarification of issues regarding fair value accounting.

Moreover, the commission continues to bring significant enforcement actions, including a recent crackdown on: an US$11.6 million insider trading ring; an international boiler room operation which raised more than US$44 million from 1,400 investors; and a financial planner who defrauded his clients of at least US$6.5 million by claiming that he would invest their funds in the government’s Troubled Asset Relief Program and non-existent securities.

Ultimately, however, the public’s loss of confidence – another casualty of the crisis – raises tough questions along with the demand for regulatory response. Can any regulatory framework or authority prevent either a true con artist from circumventing rules designed to stop fraud or the public from being susceptible to greed? Also, given the prior failure of regulators to halt Madoff, will we now require another body to police the police? While awaiting the new regulatory dispensation, when investors, financial services firms, and others ask how to arm themselves against fraud, a simple but foolproof adage applies and requires no government intervention: if an investment opportunity sounds too good to be true, it is. Period. But if you don’t want to trust your gut, do your homework before entering into any business transactions with, let alone handing over your life savings to, anyone, even a former NASDAQ chairman.

---

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.

---