Why The British Government Wants You To Pay For Fraud, Not Stop It.

Through its own efforts and inattention, the British government has made fraud one of Britain's largest industry sectors. But it's chief response is to make you pay for it, rather than stop it, because the boom in fraud is also reflected in a boom in political donations, even while the rest of the economy is flat... 

In 2021, the financial cost of fraud was £137bn, making it the UK's sixth biggest industry sector. There were 3.7 million incidents of fraud in England and Wales in 2022, yet 86% of incidents are estimated to go under-reported. Virtually all UK adult internet users say they have seen fraudulent content. The UK was third internationally in the growth of attempted digital fraud between 2019 and 2022. The UK government's own contribution to fraud has been enormous, but not in a good way. According to the National Audit Office:

Most public bodies do not know how much fraud they face and cannot demonstrate that they have the correct level of counter fraud resources... 

The amount of fraud in government expenditure that was reported in the accounts audited by the NAO rose from £5.5 billion total in the two years before the pandemic (2018-19 and 2019-20) to £21 billion in total in the following two years. 

Of the £21 billion, £7.3 billion relates to temporary COVID-19 schemes. These estimates are in addition to an estimated around £10 billion of tax revenue lost to evasion and crime every year. The Public Sector Fraud Authority (PSFA) ...estimates that in 2020-21 there was between £33.2 billion and £58.8 billion of fraud and error in government spending and income unrelated to the pandemic. 

These figures likely understate the scale of the problem because they exclude any amounts that are too small to be reported in the context of any one set of accounts and no estimate was made of the level of fraud in the Department for Health and Social Care’s COVID-19 spend.

Not only is the UK government careless with how much taxpayers' money is lost to fraudsters, it is finding new ways to distribute the burden among consumers: in other words, you are paying for industrial quantities of fraud through both your income and expenditure while the government actively contributes to the problem. The Online Safety Act is designed to shift the burden of addressing online fraud onto tech companies, whose only means of recouping their costs is via consumers. Similarly, the Payment Systems Regulator has been tasked with ensuring that banks and payment service providers - and ultimately their customers - pay for increased 'authorised push payment' fraud.

In these circumstances it should come as no surprise that the UK government is also resisting checks on the sources of political donations. By creating a boom in dirty money, and leaving key loopholes for dodgy donations, the politicians have experienced a boom in political donations:

"...donations have almost trebled... rising from £41 million in 2001 to £101 million in 2019... with 60% of donations in 2019 coming from private individuals. 

The increases in donations have favoured the Conservative party, which had £27 million more in financial resources than Labour in 2019, even when taking account of the public funding received by Labour (known as ‘Short Money’) that is designed to balance resources across the parties."

You see what they did there?

Who Warned Whom About Madoff?

As noted by FTAlphaville, a fascinating aspect to the Madoff Trustee's case against HSBC is that accountants KPMG were asked by the bank to investigate Madoff's operation twice, and issued a damning report on both occasions, in 2006 and 2008 respectively.

This adds to the evidence that suggests Madoff's Ponzi scheme was quite a poorly kept secret from about 2000. Harry Markopolos said it took him four hours to spot the Ponzi scheme in 2000, using publicly available documents. Michael Ocrant published an article after a series of interviews in 2001, as did Barrons (see paras 215-220 of the Trustee's Amended Complaint against HSBC). And according to the Telegraph, Goldman Sachs banned its asset management and brokering divisions from dealing with Madoff's funds about the same time, while "a raft of blue-chip financial institutions have suspected something was wrong for years."

As the Trustee's cases unfold, it will be interesting to discover how far and how fast word spread, and who warned whom.

But the big question is why supposedly sophisticated financial institutions appeared to ignore the warnings? The Trustee claims certain activity occurred with the "intent to hinder, delay, or defraud creditors". But why? He cites the desire for fee income (at para 16). Perhaps the banks and other intermediaries may also have thought that all was fine, so long as their more valued clients got their 'magic' returns paid or their principal out, regardless of the fact that the money came from other participants. They may also have concluded, however unwisely, that it was too late to let go of a balloon that had risen to such lofty heights, and their best chance of recovering their more valued clients' funds was to risk putting more in... If that's the case, then the business of working out where those new funds came from must have been very bloody indeed. Note the Trustee's allegations (at para's 146-148) that Madoff's involvement was deliberately kept out of the 'feeder fund' promotional documentation.

Ugly.

Yet, as is apparent from "Fooling Some of the People All of the Time", investors can remain in denial even in the face of the most dogged attempts to convince them they're being foolish.

The Magic Of Madoff

Ever since the news broke that Bernie had made off with his investors' money (did you see what I did there?), I've been waiting for the forensic accounts of what happened. Well here they are.

Because US courts tolerate relatively florid language in their pleading, these court filings do not disappoint in their sense of outrage. The case against HSBC is the juiciest, complete with a 'smoking gun' email from February 2006 (at para 20 of the Amended Complaint), largely redacted, in which certain unnamed officials reacted to almost a full alphabet of "red flags" (listed at para 18) with the immortal refrain:

"It's the magic of Madoff."

In summary, the trustee alleges that:

"21. Ultimately, as custodians and administrators, the HSBC Defendants oversaw the infusion of no less than $8.9 billion into [Bernard L. Madoff Investment Securities LLC (“BLMIS”)'s fraudulent investment advisory business] through a network of feeder funds. The HSBC Defendants funneled even more money into BLMIS in connection with derivative structured financial products that they issued and sold to their customers.

22. For their efforts, the Defendants received billions of dollars to which they are not entitled. Many of these Defendants received tens, if not hundreds, of millions of dollars by selling, marketing, lending to, and investing in financial instruments designed to substantially assist Madoff by pumping money into BLMIS and prolonging the Ponzi scheme."

Now I can't wait for the hearing - and the movie!

Image from The Memphis Flyer.